by Calculated Risk on 1/24/2012 10:00:00 AM

From the Richmond Fed: Manufacturing Activity Picks Up the Pace in January; Expectations Upbeat

In January, the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — increased nine points to 12 from December's reading of 3.

Labor market conditions at District plants strengthened in January. The manufacturing employment index moved up eight points to end at 4, and the average workweek indicator added one point to 4. Wage growth remained modest, matching its three-month average of 10.

In our January survey, our contacts were more bullish about their business prospects for the next six months. The index of expected shipments increased nine points to 36, expected orders gained eleven points to finish at 32, and backlogs added eight points to 14. The capacity utilization and vendor delivery times indexes each rose nine points to finish at 11 and 20, respectively. Moreover, readings for planned capital expenditures moved up eight points to finish at 15.

District manufacturers' hiring plans in January were somewhat more optimistic as well. The expected manufacturing employment index edged up three points to 20, while the average workweek indicator held steady at 7. The index of expected wages was virtually unchanged at 19.

This was above the consensus of a reading of 6. This follows the reports of somewhat faster expansion from the Philly Fed and Empire State surveys.

by Calculated Risk on 1/24/2012 08:39:00 AM

From the Athens News: Eurogroup rejects PSI deal

Eurozone finance ministers on Monday gave the thumbs-down to a plan for private sector involvement (PSI) in the writedown on Greek debt.
...
"We told him [Venizelos] to continue the negotiations [with Dallara] until the interest rate comes down below 4 percent," Eurogroup chairman Jean-Claude Juncker told a news conference in Brussels late on Monday.

Juncker was referring to the average interest rate (annual coupon) of the new 30-year bonds that will be issued to bondholders after the haircut of 50 percent on the face value of their portfolio.

From the WSJ: EU Ministers Resume Crisis Talks

The International Monetary Fund and the euro zone's four triple-A-rated countries—Germany, the Netherlands, Finland and Luxembourg—are pushing for a low average interest rate on new bonds to be issued as part of the restructuring ...

"Obviously Greece and the banks have to do more in order to reach a sustainable debt level," Dutch Finance Minister Jan Kees de Jager said ... He said debt restructuring terms that ensure a sustainable debt level is "absolutely a precondition" for a second EU bailout package for Greece.

Of course Greece is a small part of the problem, also from the WSJ: Fears Mount That Portugal Will Need a Second Bailout

by Calculated Risk on 1/23/2012 08:46:00 PM

The FHFA released their analysis on the effectiveness of principal reductions for Fannie and Freddie loans. The FHFA analysis showed that principal reductions would be more costly for taxpayers than other alternatives.

Here is the letter: FHFA Releases Analysis on Principal Forgiveness As Loss Mitigation Tool

Here is the analysis: FHFA Analyses of Principal Forgiveness Loan Modifications.

In considering principal forgiveness, FHFA compared taxpayer losses from principal forgiveness versus principal forbearance, which is an alternate approach that the Enterprises currently undertake to fulfill their mission at a lower cost to the taxpayer. FHFA based its conclusion that principal forgiveness results in a lower net present value than principal forbearance on an analysis initially prepared in December 2010, which is attached, along with updated analyses produced in June and December 2011, which are also attached.

Putting this determination in context, as of June 30, 2011, the Enterprises had nearly three million first lien mortgages with outstanding balances estimated to be greater than the value of the home, as measured using FHFA’s House Price Index. FHFA estimates that principal forgiveness for all of these mortgages would require funding of almost $100 billion to pay down mortgages to the value of the homes securing them. This would be in addition to the credit losses both Enterprises are currently experiencing.

Another factor to consider is that nearly 80 percent of Enterprise underwater borrowers were current on their mortgages as of June 30, 2011. (Even for more deeply underwater borrowers – those with mark-to-market loan-to-value ratios above 115 percent, 74 percent are current.) This trend contrasts with non-Enterprise loans, where many underwater borrowers are delinquent.

Given that any money spent on this endeavor would ultimately come from taxpayers and given that our analysis does not indicate a preservation of assets for Fannie Mae and Freddie Mac substantial enough to offset costs, an expenditure of this nature at this time would, in my judgment, require congressional action.
...
While it is not in the best interests of taxpayers for FHFA to require the Enterprises to offer principal forgiveness to high LTV borrowers, a principal forgiveness strategy might reduce losses for other loan holders. Indeed, in several of the examples cited, such as Ocwen and Wells Fargo, principal forgiveness is being offered to borrowers whose loans the investor or servicer purchased at a discount, which would likely change the analytics significantly. ... Additionally, less than ten percent of borrowers with Enterprise loans have negative equity in their homes (9.9 percent in June 2011), whereas loans backing private label securities were more than three times more likely to have negative equity (35.5 percent in June 2011).

This is reminder that Fannie and Freddie loans were much better than the private label loans.

As an aside: Here is a table from the report (as of June 30, 2010). This shows the total loans, the UPB (Unpaid Principal Balance) and the number of loans current. Of course house prices have fallen over the last 18 months, and there have been other changes (refinances, foreclosures, home sales), but this gives an idea of the number of HARP eligible loans for refinancing once the program becomes automated in March. HARP will apply to all current loans with LTV greater than 80% (about 7 million loans).

Note: There are just over 50 million first mortgage liens, so as of June 2010, Fannie and Freddie held about 60% of the mortgages - but a much smaller percentage of the delinquent loans.

Fannie and Freddie: MTM LTV Distribution June 30, 2010
	UPB ($ Billions)	Total Loans (000s)	Percent of UPB	Current (000s)	Percent Current
LTV Missing	$27.5	346	1.1%	315	91.0%
LTV <= 80%	$2,994.4	21,547	71.2%	20,821	96.6%
80 < LTV < 105	$1,206.5	6,461	21.4%	5,801	89.8%
105 < LTV < 115	$140.2	704	2.3%	512	72.8%
115 < LTV <= 150	$235.9	1,069	3.5%	804	75.2%
LTV > 150%	$29.6	135	0.4%	43	31.8%
Total	$4,634.1	30,262	100.0%	28,296
Source: Historical Loan Performance dataset. Excludes modifications and foreclosure alternatives. LTVs updated using FHFA's Monthly Purchase Only House Price Index.

by Calculated Risk on 1/23/2012 06:58:00 PM

The Department of Transportation (DOT) reported:

• Travel on all roads and streets changed by -0.9% (-2.1 billion vehicle miles) for November 2011 as compared with November 2010.

• Travel for the month is estimated to be 240.9 billion vehicle miles.

• Cumulative Travel for 2011 changed by -1.4% (-38.3 billion vehicle miles).

The following graph shows the rolling 12 month total vehicle miles driven.

Click on graph for larger image.

In the early '80s, miles driven (rolling 12 months) stayed below the previous peak for 39 months.

Currently miles driven has been below the previous peak for 48 months - and still counting! And not just moving sideways ... the rolling 12 month total is still declining.

The second graph shows the year-over-year change from the same month in the previous year.

This is the ninth straight month with a year-over-year decline in miles driven, although this is the smallest decline for 2011.

The decline in miles driven is probably due to a combination of high gasoline prices, a sluggish economy and some changes in driving habits.

by Calculated Risk on 1/23/2012 03:21:00 PM

A few numbers and a forecast from STR Chairman Randy Smith: Operating margins expected to rise in 2012

2011 numbers:
Demand increased 5%.
Supply (room available) increased 0.6%.
ADR (average daily rates) increased 3.8%.
RevPAR (Revenue per available room) increased 8.2%

2012 forecast from STR:
Demand: "We are currently forecasting room demand to grow about 1.3% during 2012."
Supply: "At this time, we are forecasting a modest increase in room supply for 2012 of 0.8%, which should not impact occupancy significantly."
ADR (average daily rates): 3.8% increase
RevPAR (Revenue per available room): "With modest gains in occupancy and stronger increases in room rates, we expect RevPAR to increase about 4.3% during 2012."

STR expect hotel construction to pickup soon with more deliveries in 2013: "As we enter 2012, room supply barely is keeping pace with room closures, and it could be the beginning of 2013 before we start seeing significant growth in room supply."

Since it takes some time to build hotel rooms, it might take until 2014 or later to see "significant growth in room supply".

Click on graph for larger image.

This graph shows investment in lodging as a percent of GDP. There was a sharp boom in lodging investment during the bubble, and lodging investment peaked at 0.32% of GDP in Q2 2008. However investment has fallen over 80% since then and investment is now near historic lows. With limited supply, increased demand translates to a higher occupancy rate, higher room rates and improved margins for hotels - and eventually more new construction and jobs.

It is still far from rosy for hotel owners, as Smith mentions RevPAR and occupancy are still below the pre-recession levels. And there are still plenty of distressed hotels since a number of investors bought at the top, see: California hotel foreclosures jump in 2011

Lenders foreclosed on 230 hotels in 2010, up from 138 the year before, Atlas Hospitality Group said in a report.

by Calculated Risk on 1/23/2012 12:27:00 PM

From the AP: $25B US mortgage deal goes to states (ht Terry)

The AP reports that a draft settlement "has been sent to state officials for review".

The agreement could be a adopted within "weeks".

As I noted over the weekend, President Obama will probably mention several housing initiatives - including this settlement - in the SOTU address tomorrow night.

There are some details in the article.

Weekend:
• Summary for Week ending January 20th
• Schedule for Week of Jan 22nd
• FOMC Meeting Preview

by Calculated Risk on 1/23/2012 09:09:00 AM

The new goal is to have a deal by next Monday, January 30th, when the EU leaders meet in Brussls.

From Reuters: Euro Zone Finance Ministers to Rule on Glacial Greek Debt Talks

Euro zone finance ministers will decide on Monday what terms of a Greek debt restructuring they are ready to accept as part of a second bailout package for Athens after negotiators for private creditors said they could not improve their offer.
...
"We will listen to the report on the negotiations, see how far they have gotten and have the ministers say what is acceptable and what is not in terms of outcome of the negotiations," one Eurogroup official said.

Once the guidance from the finance ministers, known as the Eurogroup, is clear, talks on the restructuring could be finalized later in the week.

Here are a few key dates in Europe:
Jan 30th: European Union leaders meet in Brussels on debt crisis.

Feb 9th: ECB holds rate meeting.
Feb 20th: Euro-area finance ministers meet in Brussels.
Feb 29th to March 1st: Italy redeems 46.5 billion euros of bonds.

March 1st and 2nd: EU leaders meet in Brussels.
March 8th: ECB holds rate meeting
March 12th: Euro-area finance ministers meet in Brussels
March 20th: Greece redeems 14.4 billion euros of bonds.
March 30th: Euro-area finance ministers meet in Copenhagen.

Late April: Proposed date for Greek general election.
April 22nd: France holds a presidential election.

Weekend:
• Summary for Week ending January 20th
• Schedule for Week of Jan 22nd
• FOMC Meeting Preview

by Calculated Risk on 1/22/2012 09:20:00 PM

Another update ... still a mess.

From Landon Thomas at the NY Times: Greek Talks Hit a Snag Over Rates

While considerable progress has been made, Greece’s financial backers — Germany and the International Monetary Fund — have been unyielding in their insistence that the longer-term bonds that would replace the current securities must carry yields in the low 3 percent range, officials involved in the negotiations said on Sunday.
...
Also holding up discussions was the question of what to do about the European Central Bank’s 55 billion euros in Greek bonds. ... To get around this, officials are now discussing the possibility that Europe’s rescue fund might lend money to Greece to allow it to buy the bonds back from the European Central Bank at the price the bank paid for them — thought to be about 75 cents on the euro.

Earlier:
• Summary for Week ending January 20th
• Schedule for Week of Jan 22nd
• FOMC Meeting Preview

by Calculated Risk on 1/22/2012 03:20:00 PM

There will be a two day meeting of the Federal Open Market Committee (FOMC) this coming Tuesday and Wednesday. I expect no changes to the Fed Funds rate, or to the program to "extend the average maturity of its holdings of securities" (scheduled to end in June 2012), or to the program to "reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities". I don't expect further accommodation (aka "QE3") to be announced at this meeting.

On Wednesday the FOMC statement will be released around 12:30PM and Fed Chairman Ben Bernanke will hold a quarterly press briefing at 2:15 PM ET.

A few things to look for:

1) FOMC participants' projections of the appropriate target federal funds rate. This will the first quarterly release of the participants' view of the appropriate path for the Fed funds rate. On Friday the Fed released blank templates for reporting participants' views. The first chart "Appropriate Timing of Policy Firming" will show when participants judge that the first increase in the target federal funds rate from its current range will occur. The second chart will the participants' view of the "Appropriate Pace of Policy Firming".

These charts will probably show that most participants judge that the first rate increase will occur in 2014 or later, and that most participants believe the appropriate policy path through 2013 will be no change in the Fed's fund rate.

2) Fed Chairman Press Briefing. At the press briefing, Chairman Bernanke will discuss the new FOMC forecasts including the two new charts on the Fed funds rate. Growth forecasts were routinely revised down all through 2011, and it is likely that GDP growth for 2012 will be revised down slightly again this month. However the unemployment rate for 2012 might be revised down or left unchanged.

I expect Bernanke will be asked about the possibility of a large scale MBS purchase program, but it appears too early for "QE3".

Here are the updated forecasts from the November meeting. The GDP projection for 2012 will probably be revised down slightly from the 2.5% to 2.9% range.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in Real GDP1	2011	2012	2013	2014
November 2011 Projections	1.6 to 1.7	2.5 to 2.9	3.0 to 3.5	3.0 to 3.9

¹ Projections of change in real GDP and in inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

The unemployment rate declined to 8.5% in December, and the projection for 2012 will probably be revised down slightly.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment Rate2	2011	2012	2013	2014
November 2011 Projections	9.0 to 9.1	8.5 to 8.7	7.8 to 8.2	6.8 to 7.7

² Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

The forecasts for overall and core inflation will probably be mostly unchanged.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE Inflation1	2011	2012	2013	2014
November 2011 Projections	2.7 to 2.9	1.4 to 2.0	1.5 to 2.0	1.5 to 2.0

Here is core inflation:

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core Inflation1	2011	2012	2013	2014
November 2011 Projections	1.8 to 1.9	1.5 to 2.0	1.4 to 1.9	1.5 to 2.0

If the economy under performs or even tracks the November projections, QE3 would seem likely at either of the two day meetings in April or June. Some have argued that QE3 could happen sooner, perhaps at the March meeting. If the economy performs better than expected, then the Fed will probably wait longer.

3) Possible Statement Changes. The FOMC met in December, and not much has changed - so the statement will probably be very similar to the December statement.

Investors will probably focus on any change to the sentence in the second paragraph: "Strains in global financial markets continue to pose significant downside risks to the economic outlook."

The FOMC will probably reiterate that they stand ready to take further action: "The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability."

The sentence "The Committee ... currently anticipates that economic conditions ... are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013" will be removed and replaced with the Fed funds rate projections.

I expect the focus will be on the press briefing and the FOMC forecasts.

Yesterday:
• Summary for Week ending January 20th
• Schedule for Week of Jan 22nd

by Calculated Risk on 1/22/2012 10:53:00 AM

The advance Q4 GDP report will be released on Friday. The consensus is that real GDP increased 3.0% annualized in Q4. Here are a few forecasts:

From Merrill Lynch:

We expect real GDP advanced 2.7% annualized in the fourth quarter after rising 1.8% in Q3. Nearly a full percentage of the growth last quarter stemmed from inventory accumulation, which means that domestic final sales rose just 1.7%. ... Stepping back, the broader story is that as the shocks of last summer have dissipated, the economy has picked up momentum. However, the bounce we’ve seen is fairly feeble ...

From Goldman Sachs:

We estimate that real GDP increased by 3.2% (annualized) in Q4, up from 1.8% in Q3. Despite this momentum in the recent data, we still expect growth to slow somewhat in the first half of 2012. ... we expect the Euro-area crisis to weigh somewhat more heavily on growth than it has done so far, mainly via financial channels.

And a few more forecasts from a week ago via the WSJ MarketBeat:

Macroeconomic Advisers cut their estimate of fourth-quarter GDP from 3.3% to 3% today on the trade news. ... J.P. Morgan economists also cut their fourth-quarter estimates ... to 3% from 3.5%.

Bank of America Merrill Lynch economist Neil Dutta cut his estimate ... "A wider trade gap implies weaker GDP; our Q4 tracking estimate is running 2.7% from 3.0% post retail sales. The broader story is that growth net of inventory accumulation – domestic demand – is softening as we head into 2012."

Still sluggish growth.