by Calculated Risk on 6/28/2010 04:00:00 PM

The 10-year Greece-to-German bond spread has widened to over 800 bps today. This is the highest level since the the EU / ECB policy response when the spread peaked at just under 1000 bps.

And from the Financial Times: Banks in Spain hit by end of ECB offer

Spanish banks have been lobbying the European Central Bank to act to ease the systemic fallout from the expiry of a €442bn ($542bn) funding programme this week ... On Thursday, the clock runs out ... One senior bank executive said: “Any central bank has to have the obligation to supply liquidity. But this is not the policy of the ECB. We are fighting them every day on this. It’s absurd.”
excerpted with permission

This liquidity facility was put in place during the financial crisis. The ECB is offering one week and three month liquidity facilities, so there won't be any short term liquidity crisis - but there are concerns that his could lead to less lending in Spain.

And a market update from Doug Short of dshort.com (financial planner).

Click on graph for interactive version in new window.

The graph has tabs to look at the different bear markets - "now" shows the current market - and there is also a tab for the "four bears".

by Calculated Risk on 6/28/2010 12:48:00 PM

From Fed Governor Kevin Warsh: It's Greek to Me

In my view, any judgment to expand the balance sheet further should be subject to strict scrutiny. I would want to be convinced that the incremental macroeconomic benefits outweighed any costs owing to erosion of market functioning, perceptions of monetizing indebtedness, crowding-out of private buyers, or loss of central bank credibility. The Fed's institutional credibility is its most valuable asset, far more consequential to macroeconomic performance than its holdings of long-term Treasury securities or agency securities. That credibility could be meaningfully undermined if we were to take actions that were unlikely to yield clear and significant benefits.

Indeed, the Federal Reserve should continue to give careful consideration to the appropriate size and composition of its existing holdings. Actual sales will not take place in the near term. But, depending on the evolution of the economy and financial markets, we should consider a gradual, prospective exit--communicated well-in-advance--from our portfolio of mortgage-backed securities. In making this judgment, we should continue to assess investor demand for these assets. Ultimately, in my view, gradual, predictable asset sales by the Fed should facilitate improvements in mortgage finance and financial markets.

Any sale of assets need not signal that policy rates are soon moving higher. Our policy tools can indeed be used independently. I would note that the Fed successfully communicated and demonstrated its ability to exit from most of its extraordinary liquidity facilities over late 2009 and early 2010, even as it continued its policy of extraordinary accommodation.

"Perceptions of monetizing indebtedness"? Although this "perception" is widespread on the internet, it isn't showing up in the bond market.

I definitely agree with Warsh on this point:

"Subprime mortgages were not at the core of the global crisis; they were only indicative of the dramatic mispricing of virtually every asset everywhere in the world."

Tanta said it better a few years ago: "We're all subprime now!"

by Calculated Risk on 6/28/2010 10:00:00 AM

Note: This is a composite index based on a number of economic releases.

From the Chicago Fed: Index shows economic activity continued to expand in May

The index’s three-month moving average, CFNAI-MA3, rose to its highest level since March 2006, increasing to +0.28 in May from +0.05 in April. May’s CFNAI-MA3 suggests that growth in national economic activity was above its historical trend. Moving above +0.20, the index’s three-month moving average in May also reached a level historically associated with a mature economic recovery following a recession.

Click on table for larger image in new window.

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

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.

This is the highest level in the index since March 2006, and indicates growth slightly above trend.

by Calculated Risk on 6/28/2010 08:30:00 AM

From the BEA: Personal Income and Outlays, April 2010

Personal income increased $53.7 billion, or 0.4 percent ... Personal consumption expenditures (PCE) increased $24.4 billion, or 0.2 percent.
...
Real PCE -- PCE adjusted to remove price changes -- increased 0.3 percent in May, in contrast to a decrease of less than 0.1 percent in April
...
Personal saving as a percentage of disposable personal income was 4.0 percent in May, compared with 3.8 percent in April.

The following graph shows real Personal Consumption Expenditures (PCE) through May (2005 dollars). Note that the y-axis doesn't start at zero to better show the change.

Click on graph for large image.

The quarterly change in PCE is based on the change from the average in one quarter, compared to the average of the preceding quarter.

Even with no growth in June, PCE growth in Q2 would be 2.3% 2.5%. It looks like my earlier estimate of 3% PCE growth in Q2 will be about right.

The National Bureau of Economic Research (NBER) uses several measures to determine if the economy is in recession. One of the measures is real personal income less transfer payments (see NBER memo). This increased in May to $9,113.9 billion (SAAR) and is barely above the low of October 2009 ($8,987 billion).

This graph shows real personal income less transfer payments since 1969.

This measure of economic activity is moving sideways - similar to what happened following the 2001 recession.

This month income increased faster than spending ... meaning the saving rate increased.

This graph shows the saving rate starting in 1959 (using a three month trailing average for smoothing) through the May Personal Income report. The saving rate increased to 4.0% in April (increased to 3.7% using a three month average).

I still expect the saving rate to rise over the next couple of years slowing the growth in PCE.

The increase in income was good news, but personal income less transfer payments are still only 1.4% above the low of last year.

by Calculated Risk on 6/27/2010 11:59:00 PM

From Paul Krugman in the NY Times: The Third Depression

Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31.
...
We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

From CR: I'm not as pessimistic as Professor Krugman, but I do think with almost double digit unemployment, the focus of policymakers should be jobs, jobs, jobs ...