by Calculated Risk on 5/23/2011 09:29:00 AM

Not a good few days for Europe. S&P warned on Italy, Fitch downgraded Greece and said an extension of maturities would be considered a default. There were large protests in Spain and Iceland's Eyjafjallajökull volcano erupted.

From Bloomberg: Greece Readies Crisis-Fighting Steps

The cost to insure Greek debt against default rose to a record and the yield on its 10-year bonds increased to a euro- era high after Standard & Poor’s said May 20 it may cut Italy’s credit rating. That warning came hours after Fitch Ratings cut Greece three grades ... and said it would consider an extension of maturities as a default.

“Greece risks a sovereign default and finance ministers have expressed strong doubts about the sluggish progress,” French Finance Minister Christine Lagarde said in a May 20 interview with Austria’s Der Standard.

Naturally bond yields are rising for some countries - and falling in Germany and in the U.S. (flight to quality). Here is a table for some European bond yields via Bloomberg (ht Nemo for the links). The Greece 10-year bond yield is now over 17% (another new record).

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

Weekend:
• Summary for Week Ending May 20th
• Schedule for Week of May 22nd

by Calculated Risk on 5/23/2011 08:30:00 AM

From the Chicago Fed: Index shows economic activity weakened in April

Led by declines in production-related indicators, the Chicago Fed National Activity Index fell to –0.45 in April from +0.32 in March. April marked the lowest reading of the index since August 2010.
...
The index’s three-month moving average, CFNAI-MA3, declined to –0.12 in April from +0.08 in March, turning negative for the first time since December 2010. April’s CFNAI-MA3 suggests that growth in national economic activity was somewhat below its historical trend. With regard to inflation, the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year.

Production-related indicators made a contribution of –0.16 to the index in April, down sharply from +0.31 in March. Manufacturing production decreased 0.4 percent in April after rising for nine consecutive months, and manufacturing capacity utilization declined to 74.4 percent in April from 74.8 percent in March. Parts shortages that resulted from the earthquakes in Japan contributed to a decline in motor vehicle and parts production.

Click on graph for larger image in graph gallery.

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 index suggests the economy was still growing in April, but below trend.

by Calculated Risk on 5/22/2011 11:52:00 PM

From Eric Dash at the NY Times: Banks Amass Glut of Homes, Chilling Sales

The nation’s biggest banks and mortgage lenders have steadily amassed real estate empires, acquiring a glut of foreclosed homes that threatens to deepen the housing slump and create a further drag on the economic recovery.

All told, they own more than 872,000 homes as a result of the groundswell in foreclosures, almost twice as many as when the financial crisis began in 2007, according to RealtyTrac, a real estate data provider. In addition, they are in the process of foreclosing on an additional one million homes and are poised to take possession of several million more in the years ahead.

The lenders definitely hold a large number of REOs (Real Estate Owned), however the RealtyTrac estimate looks a little high.

Click on graph for larger image in graph gallery.

This graph from, economist Tom Lawler, shows an estimate of all the REO inventory at the end of Q4. Fannie, Freddie release their REO inventory quarterly, and FHA releases their data monthly. Lawler estimated the REOs for FDIC insured Banks & Thrifts using the FDIC Quarterly Banking Profile (QBP) - and the Private Label Securities (PLS) data is from Barclays.

We know the combined REO inventory for Fannie, Freddie and the FHA¹ decreased to 287,184 at the end of Q1 2011, from a record 295,307 units at the end of Q4 as shown in the second graph (FHA¹ data through February).

The pace of foreclosures is picking up, but so is the pace of REO sales. Freddie Mac noted REO sales were at record levels in Q1:

We expect the pace of our REO acquisitions to increase in the remainder of 2011, in part due to the resumption of foreclosure activity by servicers, as well as the transition of many seriously delinquent loans to REO.

REO disposition reached record levels in 1Q 2011 with over 30,000 homes sold ...

Fannie Mae also sold a record 62,814 REO in Q1, up from 38,095 in Q1 2010 and 185,744 for all of 2010. So Fannie and Freddie sold over 90,000 REO in Q1, and their combined inventory only declined by 16,185. They are foreclosing at record levels, but they are finally selling REOs faster than they acquire them.

Hopefully I'll have an estimate for total Q1 REO from Lawler soon - the Q1 FDIC QBP will probably be released this week - but it appears the RealtyTrac estimate is a little high and that REO inventory is starting to decline since the lenders are selling again.

Although REO inventory might be overstated in the story, the number of loans in the foreclosure process is much higher than 1 million. The MBA reported last week that 4.52% of homes with first-lien mortgages were in the foreclosure process. There are approximately 50,000,000 homes with first-lien mortgages, and 4.52% would be 2.25 million. There are another 1.8 million homes were the borrower is more than 90 days delinquent.

Although the numbers in the story may be a little off - one thing is clear - there is still a huge of glut of distressed homes in the pipeline.

by Calculated Risk on 5/22/2011 07:00:00 PM

According to an AP report, the Lundberg Survey shows gasoline prices have fallen 9 cents per gallon over the last 2 weeks.

GasBuddy.com is showing a 16 cent per gallon decline in my area from the recent peak, and a decline of about 13 cents nationally. If WTI oil futures stay under $100 per barrel, I expect prices to fall 30 cents or more from the peak over the next few weeks.

It might be too early to see an increase in the Reuter's/University of Michigan's Consumer sentiment survey due to falling gasoline prices. Right now analysts are expecting a slight increase for May to 72.5 from the preliminary reading of 72.4. But if this trend of falling prices continues, I'd expect some improvement in June. (Note: Usually the two main drivers of sentiment are the unemployment rate and gasoline prices).

Orange County Historical Gas Price Charts Provided by GasBuddy.com

Note: GasBuddy code has a bug and the size of chart increases if you change the location or time period. Sorry.

by Calculated Risk on 5/22/2011 11:45:00 AM

J.D. Power and Associates: High Gas Prices and Lower Incentive Levels Contributing to Dismal Start for May New-Vehicle Retail Sales (ht Tim waiting for 2012)

"Retail sales in May are being hit by several negative variables—specifically, high gas prices, lower incentive levels and some inventory shortages," said Jeff Schuster, executive director of global forecasting at J.D. Power and Associates. "As a result, the industry will likely be dealing with a lower sales pace at least through the summer selling season, putting pressure on the 2011 outlook."

J.D. Power is projecting total light vehicle sales of 11.9 million in May (SAAR: seasonally adjusted annual rate). This would be down from 13.2 million in April, and only up slightly from 11.6 million in May 2010.

The projected decline in sales is mostly due to the tragedy in Japan and related supply chain issues:

The earthquake, tsunami and resulting nuclear power plant crisis in Japan have caused numerous production disruptions thus far due to parts shortages for the Japanese manufacturers. This is expected to continue throughout the second quarter of 2011, with more than 400,000 units of production expected to be lost in the short term.

However most of the decline in production will be in Japan:

The North American production forecast in 2011 has been reduced slightly, with volume now rounding down to 12.8 million units (from 12.9 million units).

So auto production in the U.S. is forecast to decline slightly although retail sales will be off sharply over the next six months.

There are already articles suggesting smart buyers wait until the automakers start offering incentives again. From Jerry Hirsch at the LA Times: Best option for car shoppers: Postpone buying

"If people were paying attention they would have bought in March and April. Now, if they have the latitude, it is probably best to wait," said Jeremy Anwyl, chief executive of Edmunds.com

Click on graph for larger image in graph gallery.

This graph shows light vehicle sales since the BEA started keeping data in 1967.

The dashed line is April estimated sales rate of 13.2 million SAAR.

The sales rate will probably drop back to the level of last summer for the next 6 months or so, and then rebound later this year. This auto slowdown has already shown up in the regional manufacturing surveys - and also in the initial weekly unemployment claims.

The key is this decline is being driven mostly by events in Japan, and is not a sign of overall weakness in the economy. Although this will be drag on GDP growth in Q2 and Q3, I don't think the drag will be huge.

Yesterday ...
• Summary for Week Ending May 20th
• Schedule for Week of May 22nd