by Calculated Risk on 11/14/2011 08:44:00 AM

From the NY Times: France Keeps a Watchful Eye on Turmoil in Italy

While Italy has replaced Greece as the focus of anxiety amid Europe’s worsening debt crisis, investors are increasingly concerned about the outlook for France, whose banks are among the world’s biggest and are closely linked with their counterparts in the United States.

One crucial gauge of investor sentiment, the difference between what France pays to borrow versus what Germany pays, has doubled since the beginning of October ...

From the WSJ: Italy Passes Bond Test — At a Cost

Italy cleared its first hurdle since economist Mario Monti agreed to form a caretaker government to force through tough fiscal reforms, comfortably selling €3 billion of short-dated bonds Monday ... The five-year bonds were sold at an average yield of 6.29%, up from 5.32% at the last tap in October, the Bank of Italy said. That was the most Italy had to pay for five-year funds at an auction during the euro era, but the yields were sharply below the peaks of 7.73% seen last week when the country's political crisis escalated.

The bonds got bids for 1.47 times the amount on offer, up from 1.34 times at the previous auction.

From the Financial Times: Eurozone crisis: live blog

[German chancellor Angela Merkel] spelt out her determination to use the crisis to forge closer EU integration in the long-term, with “political union” as the ultimate goal.

“It is time for a breakthrough to a new Europe,” she declared. “That means to build Europe in such a way that the euro has a future.”

It meant an end to eurozone governments financing their spending with debt – at the expense of future generations, she said. EU treaty change would be needed to embed budget discipline in the fundamental rules, including automatic sanctions for those who exceeded the limits on their debt and budget deficits.

From the Athens News: Samaras will not support new measures

The New Democracy leader Antonis Samaras said on Monday that his party would not vote for any new austerity measures and said the mix of policies demanded by international lenders should be changed.

"We will not vote for any new measures," Samaras told a meeting of his own MPs.

He added that he would not sign any letter pledging a commitment to austerity measures, as has been demanded by EU Economic and Monetary Affairs Commissioner Olli Rehn, and that a verbal pledge should be sufficient.

Without his support, Greece will probably not receive additional aid.

Below is a table for several European bond yields (links to Bloomberg).

The Italian 10 year bond yield is up to 6.6%.

The Spanish 10 year bond yield has increased to 6.0%. The Spanish 2 year yield is up to 4.8%.

The French 10 year bond yield is at 3.4%.

Greece	2 Year	5 Year	10 Year
Portugal	2 Year	5 Year	10 Year
Ireland	2 Year	5 Year	10 Year
Spain	2 Year	5 Year	10 Year
Italy	2 Year	5 Year	10 Year
Belgium	2 Year	5 Year	10 Year
France	2 Year	5 Year	10 Year
Germany	2 Year	5 Year	10 Year

by Calculated Risk on 11/13/2011 07:09:00 PM

This morning I linked to an LA Times article about marijuana grow houses in Las Vegas ... here is another use for vacant homes:

From Patricia Leigh Brown at the NY Times: Animal McMansion: Students Trade Dorm for Suburban Luxury

While students at other colleges cram into shoebox-size dorm rooms, Ms. Alarab, a management major, and Ms. Foster, who is studying applied math, come home from midterms to chill out under the stars in a curvaceous swimming pool and an adjoining Jacuzzi behind the rapidly depreciating McMansion that they have rented for a song.

Here in Merced, a city in the heart of the San Joaquin Valley and one of the country’s hardest hit by home foreclosures, the downturn in the real estate market has presented an unusual housing opportunity for thousands of college students. Facing a shortage of dorm space, they are moving into hundreds of luxurious homes in overbuilt planned communities.

Sounds like fun - and definitely better than the dumps I lived in going to college. Unfortunately these might be the nicest homes they live in for a number of years ...

Earlier:
• Schedule for Week of Nov 13th
• Summary for Week Ending Nov 11th
• Downside Risks for the U.S. economy.

by Calculated Risk on 11/13/2011 04:44:00 PM

No surprise ...

From the WSJ: Italy's Monti to Form New Government

"We need to fix Italy's financial situation and restart growth while paying particular attention to creating an equitable society," Mr. Monti said in a speech ...

Mr. Monti said he would name a cabinet quickly. Before the new administration can start operating, it needs approval from both houses of Parliament—a green light that is expected within days.
...
Though Mr. Monti's new government is likely to be approved quickly by Parliament, any honeymoon period will be short. First off are likely to be more budget cuts than those already announced by Italy last summer in order to balance its budget by 2013.

I wonder what Monti's proposals are to restart growth and to create a more equitable society?

From the NY Times: Mario Monti Tapped to Lead Italy Out of Debt Crisis

[I]n a sign of political wrangling to come, the leader of Mr. Berlusconi’s People of Liberty party said that the party would support a Monti government for only as long as it could fulfill its mandate to push through measures to help reduce Italy’s $2.6 trillion public debt and increase growth to keep the country competitive. The party had been pushing for early elections, and media reports said that Mr. Monti hoped to serve until the end of the current legislature in 2013.
...
On Monday, Mr. Monti was expected to present a cabinet of nonpoliticians and introduce his program before Parliament, where a majority must vote confidence in his government.

Yesterday:
• Schedule for Week of Nov 13th
• Summary for Week Ending Nov 11th

by Calculated Risk on 11/13/2011 12:47:00 PM

On Friday, Goldman Sachs economists expressed concerns about two potential negative shocks for the U.S. economy:

"We are particularly concerned about two potential negative shocks— one of which has already materialized to some degree. First, a worsening of the European financial crisis would hurt the economic outlook globally. Second, our forecast assumes that the payroll tax cut is extended for another year; if that failed to happen, the fiscal drag in early 2012 would rise significantly."

Goldman Sachs, November 11, 2011

These are downside risks to Goldman's forecast of about 1% GDP growth in the first half of 2012 - already a very weak forecast!

On the second point, additional fiscal stimulus might depend on the so-called "super committee" that has a November 23rd deadline. I have little confidence in the committee. Here is an update from the WaPo: Supercommittee hasn’t ‘given up hope,’ Hensarling says

“We haven’t given up hope,” Rep. Jeb Hensarling (R-Texas) said on CNN’s “State of the Union.” “But if this was easy, the president of the United States and the speaker of the House would have gotten it done themselves.”

It is hard to believe that Congress would raise taxes on working Americans with a 9% unemployment rate, and in an election year - but that just might happen ...

I agree that the European financial crisis and additional fiscal tightening are the two major downside risks, but I think there are several other risks worth mentioning.

Oil and gasoline prices have remained fairly high and there is always the risk of another supply shock in the middle east. Gasoline prices are already at the highest level ever for October and November. Not a great way to start the holiday shopping season.

Another ongoing drag has been state and local government cutbacks. This year, state and local governments have cut 232,000 payroll jobs (about 23 thousand per month). This might continue in 2012 (most forecasts are for cutbacks to slow next year). The California State controller recently reported:

State Controller John Chiang today released his monthly report covering California's cash balance, receipts and disbursements in October, showing revenues came in $810.5 million below projections from the recently passed state budget.

"October's poor revenues capped a very disappointing first four months of the fiscal year," said Chiang. "Unless revenues and expenditures begin to track with projections, the State will face increasing cash pressure in the months ahead."

This shortfall could lead to additional cuts in California next year, and other states are probably falling short too.

And last, but never least, the U.S. housing crisis is ongoing. House prices are now falling again, and there will be more distressed supply coming on the market - especially once the mortgage settlement is reached. It does appear the excess supply is being absorbed (based on falling vacancy rates), but there is still a long way to go.

My general forecast is for sluggish growth, but there are some significant downside risks.

Yesterday:
• Schedule for Week of Nov 13th
• Summary for Week Ending Nov 11th

by Calculated Risk on 11/13/2011 09:09:00 AM

From Ashley Powers at the LA Times: In foreclosure-plagued Vegas, empty homes go to pot

The home — with four bedrooms and 61 plants — was one of the smaller alleged grow operations authorities have dismantled this year. At another home, authorities seized 878 plants worth an estimated $2.6 million.

Las Vegas has a pot home problem. And like many of the region's maladies, it's tied to the housing slump.
...
"You can't have crime without opportunity," said William Sousa, a criminologist at the University of Nevada, Las Vegas. "And all those empty homes present an opportunity for criminal activity."

Major cultivators spend tens of thousands of dollars turning cheap homes into greenhouses.

This reminds me of a classic Jim the Realtor video: High on the Hill

Yesterday:
• Schedule for Week of Nov 13th
• Summary for Week Ending Nov 11th

by Calculated Risk on 11/12/2011 08:29:00 PM

There will be a confidence vote on Wednesday (obviously Papademos will win), and the troika inspectors (EU, the IMF and the ECB) will visit Greece early next week to obtain commitments from the new government.

But basically the beatings will continue until morale improves (more austerity), although Papademos did say getting the unemployment rate down was a top priority.

A couple of stories from the Athens News: New government offers no austerity relief, may stay longer

Greeks have largely welcomed the new government, saying the somber international policymaker [new Prime Minister Lucas Papademos] is a safer pair of hands than those of politicians they say have put their own interests ahead of those of the country.

But [Theodoros Pangalos, a returning deputy prime minister from the previous cabinet] warned voters not to expect relief from the tough tax measures decided earlier this year to qualify for further bailout tranches.

"The manoeuvring space for any relief measures in 2012 is very narrow," he said.

In his first statement as prime minister, Papademos vowed to fulfill a deal forged last month with eurozone leaders that will release an 8 billion euro loan Athens needs to avoid running out of cash next month plus longer-term funding later.

"The government's main task is to implement the decisions, the conclusions of the October 26th and 27th eurozone summit meeting, and secondly to put into force the economic policies which come together with these decisions," he said.

From the Athens News: Citizens strongly back unity coalition: polls

Greeks strongly support their new technocrat prime minister Lucas Papademos and his national unity government, opinion polls showed Saturday, which also indicated the country may continue with coalition rule after he steps down next year.

I wonder how long the support will last?

Earlier:
• Schedule for Week of Nov 13th
• Summary for Week Ending Nov 11th

by Calculated Risk on 11/12/2011 04:12:00 PM

From the WSJ: Italy Passes Budget; Berlusconi Resigns

Italian Prime Minister Silvio Berlusconi resigned on Saturday , the country's president's office said, paving the way for the formation of an interim government tasked with pulling Italy from the grip of the European debt crisis.
...
The move came after Parliament passed key economic measures that preface a much tougher round of austerity likely to be carried out under the emergency administration.

From the NY Times: Berlusconi’s Resignation Ends a 17-Year Era for Italy

The front-runner to guide a new government appears to be Mario Monti, 68, a former European commissioner and a well-respected economist with close ties to European Union officials. On Wednesday, Mr. Napolitano named Mr. Monti a senator for life, an unexpected move seen as a prelude to receiving the mandate to form a government.

In a sign of intense deal-making ahead of a delicate political transition, Mr. Monti met with Mr. Berlusconi and two of his close advisers on Saturday at the prime minister’s office.

And the beatings will continue until morale improves ...

by Calculated Risk on 11/12/2011 01:15:00 PM

Earlier:
• Summary for Week Ending Nov 11th

Two key housing reports will be released this week: November homebuilder confidence on Wednesday, and October housing starts on Thursday.

For manufacturing, the November NY Fed (Empire state) survey will be released on Tuesday, the November Philly Fed survey on Thursday, and the September Industrial Production and Capacity Utilization report on Wednesday.

On prices, the October Producer Price index (PPI) will be released Tuesday, and CPI will be released on Wednesday.

Several regional Fed presidents will be speaking this week: Chicago's Evans, St Louis' Bullard, San Francisco's Williams, and Dallas' Fischer all speak on Tuesday. On Wednesday, Richmond's Lacker and Boston's Rosengren, and on Thursday Cleveland's Pianalto and New York's Dudley.

----- Monday, Nov 14th -----
No releases scheduled.

----- Tuesday, Nov 15th -----
8:30 AM: Producer Price Index for October. The consensus is for a 0.2% decrease in producer prices (0.1% increase in core).

8:30 AM ET: NY Fed Empire Manufacturing Survey for November. The consensus is for a reading of -2.6, up from -8.48 in October (below zero is contraction).

8:30 AM: Retail Sales for October. After a strong September, the consensus is for retail sales to increase 0.2% in October, and for no change ex-auto.

10:00 AM: Manufacturing and Trade: Inventories and Sales for September. The consensus is for a 0.2% increase in inventories.

----- Wednesday, Nov 16th -----
7:00 AM: The Mortgage Bankers Association (MBA) will release the mortgage purchase applications index. This index has been especially weak since early August, although this doesn't include cash buyers.

8:30 AM: Consumer Price Index for October. The consensus is for no change in prices. The consensus for core CPI is an increase of 0.1%.

9:15 AM ET: The Fed will release Industrial Production and Capacity Utilization for October. The consensus is for a 0.4% increase in Industrial Production in October, and an increase to 77.6% (from 77.4%) for Capacity Utilization.

10 AM ET: The November NAHB homebuilder survey. The consensus is for a reading of 16, down from 18 in October. Any number below 50 indicates that more builders view sales conditions as poor than good. This index has been below 25 for four years.

During the day: The AIA's Architecture Billings Index for October (a leading indicator for commercial real estate).

----- Thursday, Nov 17th -----
8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for a slight increase to 395,000 from 390,000 last week. The 4-week average has declined recently to 400,000.

8:30 AM: Housing Starts for October. After collapsing following the housing bubble, housing starts have mostly been moving sideways for almost three years. The consensus is for a decrease to 605,000 (SAAR) from 658,000 (SAAR) in September.

10:00 AM: Philly Fed Survey for November. The consensus is for a reading of 9.0 (above zero indicates expansion, up slightly from 8.7 last month.


10:00 AM: Mortgage Bankers Association (MBA) 3rd Quarter 2011 National Delinquency Survey (NDS). The following graph shows the percent of loans delinquent by days past due for Q2. The MBA reported 8.44% of mortgage loans were delinquent at the end of Q2, seasonally adjusted, and another 4.43% were in the foreclosure process (total of 12.87%, essentially unchanged from Q1).

Click on graph for larger image.

This graph shows the percent of loans delinquent by days past due in Q2. Based on other data, the delinquency rate probably decreased slightly in Q3.

However the key problem is the large number of seriously delinquent loans (90+ days and in the foreclosure process). And there probably was little change in those percentages in Q3.

----- Friday, Nov 18th -----
10:00 AM: Conference Board Leading Indicators for October. The consensus is for a 0.5% increase in this index.

by Calculated Risk on 11/12/2011 08:11:00 AM

The drama in Europe continues to overshadow the U.S. economic situation and the European financial crisis continues to pose the greatest downside risk to the U.S. economy. See from the NY Times: Europe’s Woes Pose New Peril to Recovery in the U.S.

In the U.S., this was a light week for economic data. Initial weekly unemployment claims fell to 390,000, and the trade deficit was smaller than expected. Consumer sentiment improved, and the NFIB small business confidence index increased - although both are at very low levels.

With regards to the impact on the U.S. from the European financial crisis, the Fed’s October Senior Loan Officer Opinion Survey on Bank Lending Practices showed “considerable” tightening on lending to European banks, and some tightening to European firms, but the survey showed no tightening in the U.S. (so little spillover - at least so far).

Also the incoming data suggests Q3 GDP will be revised down a little (the trade deficit was lower than expected, but inventory growth was weaker).

Here is a summary in graphs:

• Trade Deficit declines in September as Exports increase

The trade deficit was below the consensus forecast of $46.3 billion and the deficit for August was revised down.

Click on graph for larger image.

Exports increased in September, and imports have been mostly moving sideways for the last five months (seasonally adjusted). Exports are well above the pre-recession peak and up 16% compared to September 2010; imports have stalled recently and are up about 12% compared to September 2010.

The second graph shows the U.S. trade deficit, with and without petroleum, through September.

The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products.

Oil averaged $101.02 per barrel in September, and import oil prices have been declining slowly from $108.70 per barrel in May. The trade deficit with China declined slightly to $28 billion.

Imports have been moving sideways for the last several months - partially due to slightly lower oil prices. However the trade deficit with China continues to be a significant issue. Exports are still trending up.

• CoreLogic: House Price Index declined 1.1% in September

From CoreLogic: CoreLogic® September Home Price Index Shows Second Consecutive Month-Over-Month and Year-Over-Year Decline "CoreLogic ... September Home Price Index (HPI®) which shows that home prices in the U.S. decreased 1.1 percent on a month-over-month basis, the second consecutive monthly decline."

This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100.

The index was down 1.1% in September, and is down 4.1% over the last year, and off 31.2% from the peak - and up 3.6% from the March 2011 low.

Some of this decrease is seasonal (the CoreLogic index is NSA). Month-to-month prices changes will probably remain negative through February or March 2012 - the normal seasonal pattern. It is likely that there will be new post-bubble lows for this index late this year or early in 2012.

All House Price Graphs
• BLS: Job Openings increased in September

From the BLS: Job Openings and Labor Turnover Summary "The number of job openings in September was 3.4 million, up from 3.1 million in August."

The following graph shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.

Notice that hires (dark blue) and total separations (red and blue columns stacked) are pretty close each month. When the blue line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs.

In general, the number of job openings (yellow) has been trending up, and are up about 22% year-over-year compared to September 2010.

Quits increased in September, and have been trending up - and quits are now up about 11% year-over-year. These are voluntary separations and more quits might indicate some improvement in the labor market. (see light blue columns at bottom of graph for trend for "quits").

All current employment graphs
• Ceridian-UCLA: Diesel Fuel index increased 1.1% in October

This is the UCLA Anderson Forecast and Ceridian Corporation index using real-time diesel fuel consumption data: Pulse of Commerce Index Increased 1.1 Percent in October, Offsetting the 1.0 Percent Decline in September

This index declined sharply in late summer and this small rebound only offsets some of the recent decline.

Note: This index does appear to track Industrial Production over time (with plenty of noise).

All current Transportation graphs
• Weekly Initial Unemployment Claims decline to 390,000

The DOL reports: "In the week ending November 5, the advance figure for seasonally adjusted initial claims was 390,000, a decrease of 10,000 from the previous week's revised figure of 400,000. The 4-week moving average was 400,000, a decrease of 5,250 from the previous week's revised average of 405,250."

This graph shows the 4-week moving average of weekly claims since January 2000. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased this week to 400,000.

This is the lowest level for the 4 week average since April - although this is still elevated.

All current Employment Graphs
• NFIB: Small Business Optimism Index increases slightly in October

From the National Federation of Independent Business (NFIB): Small Business Confidence Has Minor Uptick"NFIB’s Small-Business Optimism Index gained 1.3 points, nudging the Index up to 90.2. This is below the year-to-date average of 91.1, only slightly better than the average since January 2009 of 89.1."

This graph shows the small business optimism index since 1986. The index increased to 90.2 in October from 88.9 in September. This is the second increase in a row after declining for six consecutive months.

The optimism index declined sharply in August due to the debt ceiling debate and only rebounded modestly in September and October. This index has been slow to recover - probably due to a combination of sluggish growth, and the high concentration of real estate related companies in the index.

• Consumer Sentiment increased in November

The preliminary November Reuters / University of Michigan consumer sentiment index increased to 64.2, up from the October reading of 60.9, and up from 55.7 in August.

However sentiment is still very weak, although above the consensus forecast of 61.5.

• Other Economic Stories ...
• The Federal Reserve October 2011 Senior Loan Officer Opinion Survey on Bank Lending Practices
• From RealtyTrac: U.S. Foreclosure Activity Hits 7-Month High in October
• Lawler: SF REO Inventories at Fannie, Freddie, PLS, and a “Guess” at FHA
• Fannie, Freddie and FHA REO Inventory declines in Q3

by Calculated Risk on 11/11/2011 09:49:00 PM

Today NAR chief economist Lawrence Yun provided his annual overly optimistic forecast for next year, but more importantly he provided an update on the coming revisions:

NAR presently is benchmarking existing-home sales, and downward revisions are expected for totals in recent years, although there will be little change to previously reported comparisons based on percentage change. There will be will be no change to median prices or month’s supply of inventory. Publication of the improved measurement methodology is expected in the near future.

Sales will be revised down for the last few years, and inventory will also be revised down, with no change to months-of-supply. I expect sales for 2011 will be down around 10% to 15% (less for earlier years), and inventory by the same amount.