by Calculated Risk on 9/07/2010 09:03:00 AM

After the WSJ story last night on the European stress tests, here is an update on a few European bond spreads:

The 10-year Ireland-to-Germany bond spread has risen to 376 bps. This spread is larger than during the financial crisis in May when the spread peaked at 306 bps.

The 10-year Greece-to-Germany bond spread is now 946 bps, just below the peak level of 963 bps in May.

The 10-year Portugal-to-Germany bond spread is now 351 bps, just above the peak in May of 349 bps.

by Calculated Risk on 9/06/2010 09:30:00 PM

From the WSJ tonight: Europe's Bank Stress Tests Minimized Debt Risk

We've discussed this several times - as an example, in Part 5D of the sovereign debt series, "some investor guy" wrote:

Q1. Was there much sovereign stress in the European bank stress tests?

NO. The most glaring oversight, in the opinion of the author and many other analysts, is assuming there would be no sovereign defaults, and thus not showing any losses on the bank’s long term holdings (in the banking category vs the “trading book”). According to the Committee of European Banking Supervisors, the sovereign stress scenario results in “39 billion euro associated with valuation losses of sovereign exposures in the trading book “.

“The haircuts are applied to the trading book portfolios only, as no default assumption was considered, which would be required to apply haircuts to the held to maturity sovereign debt in the banking book.”

Note: Here are links for the entire sovereign debt series.

Here is the weekly summary for last week (a busy week).

And the Economic Schedule for this week (a light week).

by Calculated Risk on 9/06/2010 04:10:00 PM

Every month the BLS puts out a report that discusses the difference between the household and establishment surveys: Employment from the BLS household and payroll surveys: summary of recent trends

The Unemployment Rate comes from the Current Population Survey (CPS: commonly called the household survey), a monthly survey of about 60,000 households.

The jobs number comes from Current Employment Statistics (CES: payroll survey), a sample of approximately 390,000 business establishments nationwide.

These are very different surveys: the CPS gives the total number of employed (and unemployed including the alternative measures), and the CES gives the total number of positions (excluding some categories like the self-employed, and a person working two jobs counts as two positions).

The linked monthly report from the BLS discusses the differences, and adjusts the household survey to "an employment concept more similar to the payroll survey’s".

Click on graph for larger image in new window.

This graph from the BLS shows the household survey, the payroll survey and the adjusted household survey.

I was inspired to post this graph by Professor Nancy Folbre's post at Economix: Taking the ‘Un’ Out of Unemployment

A focus on employment, rather than unemployment, provides additional perspective. ...

The employment measure is unaffected by assumptions regarding the character, motives or incentives facing the unemployed.

And trends in this measure, as shown above, could discourage even the most optimistic among us, if they would just pay attention to it.

As Steven Hipple, a Bureau of Labor Statistics economist, puts it in a more detailed analysis of trends through the end of 2009, “Economic decision-makers might not understand the depth of the economic hole in the labor market.”

Little employment growth for a decade is quite a "hole".

Note: Over the same decade, according to the Census Bureau, the U.S. population, has increased from around 285 million to 310 million.

by Calculated Risk on 9/06/2010 12:06:00 PM

From the NY Times: Obama to Call for $50 Billion Spending on Public Works

President Obama on Monday is to call for as much as $50 billion in government spending to start up a long-term public works plan emphasizing transportation projects – roads, rail and airport runways – over the next six years.
...
The spending is one part of a broader economic recovery package that Mr. Obama is to unveil during a speech in Cleveland on Wednesday.
...
While Mr. Obama’s plan would call for investment over six years, the White House says it would be front-loaded with an initial investment of $50 billion in taxpayer money, to help create jobs in the shorter term.

Based on some media leaks, I'm not optimistic that the recovery package to be announced on Wednesday will help significantly with (un)employment. However this investment seems to make sense.

by Calculated Risk on 9/06/2010 09:15:00 AM

The following graph shows the two bank stress test scenarios compared to the Case-Shiller Composite 10 Index.

Click on graph for larger image in new window.

The heavy government support for house prices has kept prices well above the baseline scenario. But is this good news?

With prices higher than projected, banks have taken fewer write downs than originally expected - and many homeowners have been able to refinance into Fannie and Freddie (or FHA insured) loans putting the future risk on the taxpayer. This is good news for the banks.

However, since prices are still too high in many areas, the market has not cleared and there is still too much inventory. Until the excess inventory is absorbed, there will be little new construction and few construction related jobs - and the recovery will remain sluggish.