by Calculated Risk on 3/25/2013 01:23:00 PM

This is a response to some analysts who think central bankers are currently following a "beggar-thy-neighbor" policy. Fed Chaiman Bernanke disagrees (so do I).

From Fed Chairman Ben Bernanke: Monetary Policy and the Global Economy. A few excerpts:

The uncoordinated abandonment of the gold standard in the early 1930s gave rise to the idea of "beggar-thy-neighbor" policies. According to this analysis, as put forth by important contemporary economists like Joan Robinson, exchange rate depreciations helped the economy whose currency had weakened by making the country more competitive internationally.5 Indeed, the decline in the value of the pound after 1931 was associated with a relatively early recovery from the Depression by the United Kingdom, in part because of some rebound in exports. However, according to this view, the gains to the depreciating country were equaled or exceeded by the losses to its trading partners, which became less internationally competitive--hence, "beggar thy neighbor." Over time, so-called competitive depreciations became associated in the minds of historians with the tariff wars that followed the passage of the Smoot-Hawley tariff in the United States. Both types of policies were decried--and in some textbooks, still are--as having prolonged the Depression by disrupting trade patterns while leading to an ultimately fruitless and destructive battle over shrinking international markets.

Economists still agree that Smoot-Hawley and the ensuing tariff wars were highly counterproductive and contributed to the depth and length of the global Depression. However, modern research on the Depression, beginning with the seminal 1985 paper by Barry Eichengreen and Jeffrey Sachs, has changed our view of the effects of the abandonment of the gold standard.6 Although it is true that leaving the gold standard and the resulting currency depreciation conferred a temporary competitive advantage in some cases, modern research shows that the primary benefit of leaving gold was that it freed countries to use appropriately expansionary monetary policies. By 1935 or 1936, when essentially all major countries had left the gold standard and exchange rates were market-determined, the net trade effects of the changes in currency values were certainly small. Yet the global economy as a whole was much stronger than it had been in 1931. The reason was that, in shedding the strait jacket of the gold standard, each country became free to use monetary policy in a way that was more commensurate with achieving full employment at home. Moreover, and critically, countries also benefited from stronger growth in trading partners that purchased their exports. In sharp contrast to the tariff wars, monetary reflation in the 1930s was a positive-sum exercise, whose benefits came mainly from higher domestic demand in all countries, not from trade diversion arising from changes in exchange rates.

The lessons for the present are clear. Today most advanced industrial economies remain, to varying extents, in the grip of slow recoveries from the Great Recession. With inflation generally contained, central banks in these countries are providing accommodative monetary policies to support growth. Do these policies constitute competitive devaluations? To the contrary, because monetary policy is accommodative in the great majority of advanced industrial economies, one would not expect large and persistent changes in the configuration of exchange rates among these countries. The benefits of monetary accommodation in the advanced economies are not created in any significant way by changes in exchange rates; they come instead from the support for domestic aggregate demand in each country or region. Moreover, because stronger growth in each economy confers beneficial spillovers to trading partners, these policies are not "beggar-thy-neighbor" but rather are positive-sum, "enrich-thy-neighbor" actions.

by Calculated Risk on 3/25/2013 10:45:00 AM

From the Dallas Fed: Texas Manufacturing Activity Picks Up

Texas factory activity increased in March, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, rose from 6.2 to 9.9, indicating a slightly faster pace of output growth. The share of manufacturers noting a decrease in production fell to its lowest level in two years.

Other survey measures also suggested a pickup in manufacturing activity, with the new orders and shipments indexes moving up strongly in March after dipping in February. The new orders index came in at 8.7, up from 2.8, and the shipments index rose 8 points to 10.6.

Perceptions of broader business conditions improved in March. The general business activity index rose from 2.2 to 7.4, reaching its highest level in a year. The company outlook index moved up from 6.3 to 9.6.

Labor market indicators remained mixed. The employment index has been in positive territory so far in 2013 and edged up to 2.6 in March. ... The hours worked index remained slightly negative but ticked up to from –3 to –2.4.
emphasis added

All of the regional manufacturing surveys released so far have indicated expansion in March, and this suggests a pickup in overall manufacturing following a weak period over the last 6 to 8 months.

by Calculated Risk on 3/25/2013 08:43:00 AM

The Chicago Fed released the national activity index (a composite index of other indicators): Economic Activity Improved in February

Led by gains in production-related indicators, the Chicago Fed National Activity Index (CFNAI) increased to +0.44 in February from –0.49 in January. All four broad categories of indicators that make up the index increased from January, and three of the four categories made positive contributions to the index in February.

The index’s three-month moving average, CFNAI-MA3, decreased to +0.09 in February from +0.28 in January, marking its fourth consecutive reading above zero. February’s CFNAI-MA3 suggests that growth in national economic activity was somewhat above its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests limited inflationary pressure from economic activity over the coming year.
emphasis added

This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967.

Click on graph for larger image.

This suggests economic activity improved in February, and growth was somewhat above its historical trend (using the three-month average).

According to the Chicago Fed:

What is the National Activity Index? The index is a weighted average of 85 indicators of national economic activity drawn from four broad categories of data: 1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories.

A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth.

by Calculated Risk on 3/24/2013 09:16:00 PM

Cyprus and the "troika" have reached a deal tonight. Reports are the euro zone finance ministers have also approved the plan. Preliminary reports are that there will be no tax on depositors, and apparently this means approval from the Cypriot Parliament is not required.

Update: Eurogroup statement: Eurogroup Statement on Cyprus

A few details from CyprusMail: Bailout deal reached

Deposits below 100,000 euros in Laiki will be transferred to Bank of Cyprus. Deposits above 100,000 euros, which under EU law are not insured, will be frozen and will be used to resolve debt. It remains unclear how large the writedown on those funds will be. Some reports suggested it might be as high as 40 per cent. Sources told Reuters that the proposal involved shifting deposits below 100,000 euros from the Popular Bank of Cyprus (also known as Laiki) to the Bank of Cyprus to create a "good bank".

Monday economic releases:
• At 8:30 AM ET, Chicago Fed National Activity Index for February. This is a composite index of other data.

• At 10:30 AM, Dallas Fed Manufacturing Survey for March. The consensus is an increase to 3.4 from 2.2 in February (above zero is expansion).

• At 1:15 PM, Speech by Fed Chairman Ben Bernanke, Monetary Policy and the Global Economy, At the London School of Economics and Political Science, London, United Kingdom

Weekend:
• Summary for Week Ending March 22nd
• Schedule for Week of March 24th

The Asian markets opened green tonight with the Nikkei up 1.4%.

From CNBC: Pre-Market Data and Bloomberg futures: the S&P futures are up 8 and Dow futures are up 70 (fair value).

Oil prices are up with WTI futures at $94.02 per barrel and Brent at $107.95 per barrel.

by Calculated Risk on 3/24/2013 08:10:00 PM

From CNBC: Cyprus, European Union Reach Draft Bailout Deal

Cyprus and its international lenders have reached a draft deal to rescue Cyprus, sources told CNBC.

No levy will be imposed on any deposits in Cypriot banks, but there will be a 'bail in' of Laiki depositors.

From the Peter Spiegel of the Financial Times:

All Laiki deposits over €100k will be whacked. Total of haircut at BoC has not been decided.

The Eurogroup still needs to meet, and then the Cyprus Parliament.

Update: CyprusMail: Bailout deal reached

Acting president Yiannakis Omirou has confirmed that a deal has been struck between Cyprus and international lenders.

Government sources suggest that the deal provides for a 30 per cent haircut on deposits of over €100,000 at Bank of Cyprus while reports said Popular Bank would be resolved.

Laiki deposits under 100,000 will be transferred to a ‘good bank,’ reports said.

by Calculated Risk on 3/24/2013 02:05:00 PM

By request, here is an update to a graph that I've been posting for several years.  This shows single family housing starts (through February 2013) and the unemployment rate (inverted) also through February. Note: there are many other factors impacting unemployment, but housing is a key sector.

You can see both the correlation and the lag. The lag is usually about 12 to 18 months, with peak correlation at a lag of 16 months for single unit starts. The 2001 recession was a business investment led recession, and the pattern didn't hold.

Housing starts (blue) increased a little in 2009 with the homebuyer tax credit - and then declined again - but mostly starts moved sideways for two and a half years and only started increasing steadily near the end of 2011. This was one of the reasons the unemployment rate remained elevated.

Click on graph for larger image.

Usually near the end of a recession, residential investment (RI) picks up as the Fed lowers interest rates. This leads to job creation and also additional household formation - and that leads to even more demand for housing units - and more jobs, and more households - a virtuous cycle that usually helps the economy recover.  However this time, with the huge overhang of existing housing units, this key sector didn't participate for an extended period. 

The good news is single family starts have been increasing steadily for over a year, and that should mean more construction employment this year, and that the unemployment rate should decline further in 2013.

by Calculated Risk on 3/24/2013 09:50:00 AM

Updates at 1:45 PM ET: Meeting now scheduled for 3 PM ET. Cyprus central bank is now limiting cash withdrawals to 100 euros per day.

Cypriot President Nicos Anastasiades is in Brussels to hold talks with the "troika" and the Eurogroup meeting is scheduled to start at 1700 GMT (1 PM ET). Of course these meetings always start and run late ...

From the NY Times: As Deadline Nears, Cyprus Scrambles to Devise a Bailout

The Cypriot president, Nicos Anastasiades, flew to Brussels on Sunday after mapping out a tentative outline of a deal late Saturday with representatives of the troika of negotiators involved in the bailout: the European Central Bank, the European Commission and the International Monetary Fund.

His first order of business was a meeting with Mario Draghi, the president of the central bank; Christine Lagarde, the managing director of the monetary fund; and José Manuel Barroso, the president of the commission. Herman Van Rompuy, the president of the European Council, which represents European Union leaders, was expected to preside over the meeting.

Mr. Anastasiades had also briefed Cypriot political leaders on the outline...

The revised bailout terms now under discussion would assess a one-time tax of 20 percent on deposits above 100,000 euros at one of the nation’s biggest banks, the Bank of Cyprus, which has the largest number of savings accounts on the island. ...

A separate tax of 4 percent would be assessed on uninsured deposits at all other banks, including the 26 foreign banks that operate in Cyprus.

Under the plan, savings under 100,000 euros would not be touched ...

From the CyprusMail: Cyprus seeks 11th-hour deal to avert financial collapse

Without a deal on Monday, the ECB says it will cut off emergency funds to Cypriot banks, spelling certain collapse and potentially pushing the country out of the euro zone.

Finance Ministers of the 17-nation euro zone will meet at 1700 GMT Sunday. ...
A senior Cypriot official said Nicosia had agreed with its lenders on a 20 per cent levy over and above €100,000 at the island's largest lender, Bank of Cyprus, and four per cent on deposits above the same level at other banks.

Media reports suggested talks were stuck on a demand by the IMF that Bank of Cyprus absorb the good assets of competitor Popular Bank and take on its nine billion euro debt to the central bank as well.

by Calculated Risk on 3/23/2013 05:32:00 PM

Here is the unofficial problem bank list for Mar 22, 2013.

Changes and comments from surferdude808:

As expected, a quiet week as there were only four removals from the Unofficial Problem Bank List. The removals leave the list at 797 institutions with assets of $294.3 billion. The list has not been under 800 since Friday, July 23, 2010. A year ago, the list held 949 institutions with assets of $379.8 billion.

Actions were terminated against Saehan Bank, Los Angeles, CA ($602 million Ticker: SAEB); CIBM Bank, Champaign, IL ($471 million Ticker: CIBH); Bank of Little Rock, Little Rock, AR ($193 million); and Bank VI, Salina, KS ($65 million). In a more rare event, the Federal Reserve terminated a Prompt Corrective Action order against Bank of Bartlett, Bartlett, TN ($370 million).

Next week, we anticipate the FDIC will release its enforcement action through February 2013.

Earlier:
• Summary for Week Ending March 22nd
• Schedule for Week of March 24th

by Calculated Risk on 3/23/2013 01:09:00 PM

Earlier:
• Summary for Week Ending March 22nd

The key reports this week are the February New Home sales report on Tuesday, Case-Shiller house prices for January, also on Tuesday, the February Personal Income and Outlays report on Friday, and the third estimate of Q4 GDP on Thursday.

Fed Chairman Ben Bernanke will speak on Monday at the London School of Economics.

Also, for manufacturing, the Dallas, Richmond and Kansas City Fed surveys for March will be released this week.

Note: the ECB deadline for Cyprus is Monday evening.

----- Monday, Mar 25th-----
8:30 AM ET: Chicago Fed National Activity Index for February. This is a composite index of other data.

10:30 AM: Dallas Fed Manufacturing Survey for March. The consensus is an increase to 3.4 from 2.2 in February (above zero is expansion).

1:15 PM: Speech by Fed Chairman Ben Bernanke, Monetary Policy and the Global Economy, At the London School of Economics and Political Science, London, United Kingdom

----- Tuesday, Mar 26th -----
8:30 AM: Durable Goods Orders for February from the Census Bureau. The consensus is for a 3.5% increase in durable goods orders.

9:00 AM: S&P/Case-Shiller House Price Index for January. Although this is the January report, it is really a 3 month average of November, December and January.

This graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indexes through December 2012 (the Composite 20 was started in January 2000).

The consensus is for a 8.2% year-over-year increase in the Composite 20 index (NSA) for January. The Zillow forecast is for the Composite 20 to increase 8.0% year-over-year, and for prices to increase 0.8% month-to-month seasonally adjusted.

10:00 AM: New Home Sales for February from the Census Bureau.

This graph shows New Home Sales since 1963. The dashed line is the January sales rate.

The consensus is for a decrease in sales to 425 thousand Seasonally Adjusted Annual Rate (SAAR) in February from 437 thousand in January.

10:00 AM: Richmond Fed Survey of Manufacturing Activity for March. The consensus is for a reading of 5.5 for this survey, down from 6.0 in February (Above zero is expansion).

10:00 AM: Conference Board's consumer confidence index for March. The consensus is for the index to decrease to 69.0.

----- Wednesday, Mar 27th -----
7:00 AM: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

10:00 AM ET: Pending Home Sales Index for February. The consensus is for a 0.7% decrease in this index.

----- Thursday, Mar 28th -----
8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for claims to increase to 340 thousand from 336 thousand last week.  The "sequester" budget cuts might start impacting weekly claims soon.

8:30 AM: Q4 GDP (third estimate). This is the third estimate of GDP from the BEA. The consensus is that real GDP increased 0.6% annualized in Q4, revised up from 0.1% in the second estimate.

9:45 AM: Chicago Purchasing Managers Index for March. The consensus is for a decrease to 56.1, down from 56.8 in February.

11:00 AM: Kansas City Fed regional Manufacturing Survey for March.  The consensus is for a reading of minus 3, up from minus 10 in February (below zero is contraction).

SIFMA recommends 2:00 PM market close on Thursday in observance of the Good Friday Holiday.

----- Friday, Mar 29th -----
Note: Markets Closed in observance of the Good Friday Holiday.

8:30 AM ET: Personal Income and Outlays for February. The consensus is for a 0.9% increase in personal income in February (following the sharp increase in December due to some people taking income early to avoid higher taxes, and then the sharp decline in January), and for 0.6% increase in personal spending. And for the Core PCE price index to increase 0.2%.

9:55 AM: Reuter's/University of Michigan's Consumer sentiment index (final for March). The consensus is for a reading of 72.5.

10:00 AM: Regional and State Employment and Unemployment (Monthly) for February 2013

by Calculated Risk on 3/23/2013 08:11:00 AM

The major story this week was the ongoing crisis in Cyprus.  There will be further developments this weekend with a Monday deadline (the ECB will not provide liquidity to Cyprus banks after Monday, without an "EU/IMF programme in place").  The resolution is unclear and anything could happen, although it seems likely that Cyprus will remain in eurozone and receive a bailout - and that large depositors (over €100,000) will take significant losses.

The events in Cyprus are a reminder that there are downside risks to the economy, with the two most obvious risks being Europe and overly restrictive US fiscal policy.  Otherwise the economy appears to be improving.

This was another week of solid economic data.  Housing starts were up again, and are now up 27.7% year-over-year.  Even with the strong increase in starts, total housing starts are still historically very low suggesting more growth over the next few years.

The existing home sales report was solid too with a strong increase in conventional sales.  Inventory is still falling sharply on a year-over-year basis, but it appears the year-over-year decline may be slowing (inventory is very low right now).

Other positive data included an increase in the Architecture Billings Index (leading indicator for commercial real estate) that was at the highest level since 2007, and a decrease in the 4-week average of initial weekly unemployment claims - at the lowest level since February 2008. It is a good sign when indicators are the highest in years (or lowest in years for negative indicators like unemployment claims). Even manufacturing showed signs of life in the New York and Philly Fed manufacturing surveys.

The sequestration budget cuts will probably start slowing the economy soon, but right now the economy is clearly improving.

Here is a summary of last week in graphs:

• Housing Starts increased to 917 thousand SAAR in February

Click on graph for larger image.

From the Census Bureau: "Privately-owned housing starts in February were at a seasonally adjusted annual rate of 917,000. This is 0.8 percent above the revised January estimate of 910,000 and is 27.7 percent above the February 2012 rate of 718,000.

Single-family housing starts in February were at a rate of 618,000; this is 0.5 percent above the revised January figure of 615,000. The February rate for units in buildings with five units or more was 285,000."

This was at expectations of 919 thousand starts in February. Starts in February were up 27.7% from February 2012; single family starts were up 31.5% year-over-year. Starts in December and January were revised up, and permits were strong. This was another solid report.

All Housing Investment and Construction Graphs
• Existing Home Sales in February: 4.98 million SAAR, 4.7 months of supply

This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.

Sales in February 2013 (4.98 million SAAR) were 0.8% higher than last month, and were 10.2% above the February 2012 rate.

The next graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory.

Inventory decreased 19.2% year-over-year in February from February 2012. This is the 24th consecutive month with a YoY decrease in inventory, but the smallest YoY decrease since 2011 (I expect the YoY decrease to get smaller all year).

Months of supply increased to 4.7 months in February.

This was close to expectations of sales of 5.01 million. For existing home sales, the key number is inventory - and the sharp year-over-year decline in inventory is a positive for housing.

All current Existing Home Sales graphs
• AIA: Architecture Billings Index increases, Strongest Growth since 2007

From AIA: Architecture Billings Index Continues to Improve at a Healthy Pace "The American Institute of Architects (AIA) reported the February ABI score was 54.9, up slightly from a mark of 54.2 in January. This score reflects a strong increase in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 64.8, higher than the reading of 63.2 the previous month – and its highest mark since January 2007."

This graph shows the Architecture Billings Index since 1996.

Every building sector is now expanding and new project inquiries are strongly positive (highest since January 2007). Note: This includes commercial and industrial facilities like hotels and office buildings, multi-family residential, as well as schools, hospitals and other institutions.

According to the AIA, there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction.  This index has been positive for seven consecutive months and suggests some increase in CRE investment in the second half of 2013.

• Weekly Initial Unemployment Claims increase to 336,000

The DOL reports "In the week ending March 16, the advance figure for seasonally adjusted initial claims was 336,000, an increase of 2,000 from the previous week's revised figure of 334,000. The 4-week moving average was 339,750, a decrease of 7,500 from the previous week's revised average of 347,250."
The previous week was revised up from 332,000.

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased to 339,750 - this is the lowest level since early February 2008.

Weekly claims were below the 340,000 consensus forecast.  Note: Claims might increase over the next few months due to the "sequestration" budget cuts, but right now initial unemployment claims suggest an improving labor market.

• Philly Fed Manufacturing Survey Shows Expansion in March

From the Philly Fed: March Manufacturing Survey "The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from a reading of -12.5 in February to 2.0 this month ... The new orders index increased from a reading of -7.8 in February to 0.5, its first positive reading in three months."

Here is a graph comparing the regional Fed surveys and the ISM manufacturing index. The dashed green line is an average of the NY Fed (Empire State) and Philly Fed surveys through March. The ISM and total Fed surveys are through February.

The average of the Empire State and Philly Fed surveys increased in March, and is back above zero.   This suggests the ISM manufacturing index will show further expansion in March.