by Calculated Risk on 5/25/2012 08:45:00 AM

From Tim Duy at Economist's View Fed Watch: Is QE3 Just Around the Corner?

[T]oday's comments from New York Federal Reserve President William Dudley [are interesting]. From the Wall Street Journal:

Expectations for U.S. economic growth, while “pretty disappointing” at around 2.4%, is sufficient to keep the central bank from easing monetary policy, Federal Reserve Bank of New York President William Dudley said.

“My view is that, if we continue to see improvement in the economy, in terms of using up the slack in available resources, then I think it’s hard to argue that we absolutely must do something more in terms of the monetary policy front,” Dudley said in an interview with CNBC, aired Thursday.

Dudley is considered part of the inner circle; if he doesn't think the Fed needs to do something more, the baseline scenario should be that QE3 is not on the table.

At least for the moment. Simply put, I think market participants are getting ahead of the Fed. My suspicion is that the Fed will need to see a weaker data flow in the months ahead to justify getting back into the game. ...
...
Overall, it seems unlikely that the data flow as a whole will turn fast enough to prompt the Fed into easing next month. Only the next employment report stands out as a potential deal breaker. In general, though, I would think you need at a minimum the Q2 GDP report to justify additional easing - which pushes us out to the July/August meeting at least.

So if we take the US data off the table, then we are looking for financial disruption, which is obviously a possibility given the current unpleasantness in Europe. Indeed, we should not be surprised if the Fed needs to further improve dollar liquidity abroad (an action that is sure to be taken as a sign that QE3 is imminent; expect Fed speakers to deny a policy shift is afoot). And note that the next FOMC meeting is just 2 days after the June 17 Greek vote - and that could be the vote heard round the financial world that prompts the Fed to act.
...
[F]inancial conditions will need to deteriorate dramatically to prompt action in June. So if you are looking for the Fed to ease in just four weeks, you are looking for financial markets to turn very, very ugly. Lehman ugly. And I wish that I could say that it won't happen, but European policymakers are hell-bent to push their economies to the wall while worshipping at the alter of moral hazard.

CR Note: The Fed's program to extend the average maturity of its holdings (aka "Operation Twist") ends in June, and the Fed might consider QE3 some time after that program ends. But as Tim Duy notes - based on Dudley's comments and unless Europe implodes after the Greek election - it is too soon to be looking for QE3 right now.

by Calculated Risk on 5/24/2012 10:28:00 PM

First a little European gloom ... Note: US markets will be closed on Monday in observance of the Memorial Day, but the European markets will be open.

From the NY Times: European Economic Outlook Dims Amid Leaders’ Impasse

A Markit Economics index that tracks the European services and manufacturing sectors fell in May to 45.9 from 46.7, worse than economists surveyed by Reuters and Bloomberg had expected. An index reading below 50 suggests the economy is contracting. ...

Perhaps even more worryingly, German data released Thursday showed signs of a slowdown in an economy that until now had been a bright spot for the Continent. A Markit index based on surveys of purchasing managers of German manufacturing companies fell to 45.0 in May from 46.2 in April.

A separate report from the Ifo Institute, based on surveys of German companies, showed “greater pessimism about their business outlook,” and noted that the “recent surge in uncertainty in the euro zone is impacting the German economy.”

And from the NY Times: British Recession Is Worse Than Thought, Data Says

The Office for National Statistics revised the decline in gross domestic product in the first three months of this year to 0.3 percent, from the 0.2 percent it estimated last month, because of a deeper slump in the construction industry. Construction output dropped 4.8 percent from a year earlier, the agency said, not 3 percent, as it had estimated earlier.

The revised figures were “bad news for U.K. policy makers as it shows the economy faring even more badly than initially thought,” said Scott Corfe, senior economist at the Center for Economics and Business Research in London. “Indeed, the latest data show the U.K. economy performing worse than the euro zone economy, which saw zero growth at the start of the year — meaning the U.K.’s woes cannot even be fully attributable to the debt crisis embroiling the Continent.”

• Friday at 9:55 AM ET the final May Reuter's/University of Michigan's Consumer sentiment index will be released. The consensus is for no change from the preliminary reading of 77.8. The recent decline in gasoline prices might boost sentiment, although that might be offset by weaker job growth and European concerns. From MarketWatch: Gasoline prices add to the holiday cheer

The average price for a gallon of regular gas has fallen each day since May 16 and stood at $3.676 on Thursday, according to AAA data. That is down 17 cents from a month ago.

by Calculated Risk on 5/24/2012 08:37:00 PM

Below is a graph comparing mortgage rates from the Freddie Mac Primary Mortgage Market Survey® (PMMS®) and the refinance index from the Mortgage Bankers Association (MBA).

Freddie Mac reported earlier today that 30 year mortgage rates had fallen to a record 3.78% in the PMMS®.

And the MBA reported yesterday that refinance activity has been increasing again.

Earlier from Freddie Mac: Historic Lows for Fixed Mortgage Rates Hold Steady

30-year fixed-rate mortgage (FRM) averaged 3.78 percent with an average 0.8 point for the week ending May 24, 2012, down from last week when it averaged 3.79 percent. Last year at this time, the 30-year FRM averaged 4.60 percent.

Click on graph for larger image.

This graph shows the MBA's refinance index (monthly average) and the the 30 year fixed rate mortgage interest rate from the Freddie Mac Primary Mortgage Market Survey®.

The Freddie Mac survey started in 1971 and mortgage rates are currently at the record low for the last 40 years.

It usually takes around a 50 bps decline from the previous mortgage rate low to get a huge refinance boom - and rates are getting close! The 30 year conforming mortgage rates were at 4.23% in October 2010, so a 50 bps drop would be 3.73% - just below the current rate.

There has also been an increase in refinance activity from borrowers with negative equity and loans owned or guaranteed by Fannie or Freddie. As the MBA noted, the HARP share of refinance applications was 28 percent last week.

by Calculated Risk on 5/24/2012 04:39:00 PM

From economist Tom Lawler:

Post-Census Study of Census 2010: Population, Household Count Extremely Close; Vacant Housing Unit Count Too Low

Census yesterday released some of the results from its “Census Coverage Measurement” (CCM) program for Census 2010, which is a post-enumeration exercise to assess the “accuracy” of the decennial Census numbers. While there’s a lot of “stuff” in the two CCM memoranda released yesterday, here are a couple of “highlights.”

1. The CCM (similar to the 2000 A.C.E. Revision II and the 1990 P.E.S) for the US household population (excluding remote Alaska areas) suggests that the 2010 Census had a de minimus net “over-count” of just 36,000, or 0.01%. Studies mentioned above suggested that Census 2000 had a net over-count of 0.49%, and Census 1990 had a net under-count of 1.61%. While net over/under-counts for specific race/ethnic groups or age groups were in many cases “significantly different from zero,” on balance Census 2010 seems to have been the “best” ever. (see http://2010.census.gov/news/pdf/g-01.pdf)

2. The CCM designed to provide estimates of housing unit net coverage suggest that Census 2010 under-counted the number of US housing units by 0.60%, similar to Census 2000’s estimated 0.61% under-count. The 2010 estimated under-count for occupied units was an insignificant 0.03%, below Census 2000’s 0.33%, while the estimated under-count for vacant units was 4.80%, higher than Census 2000’s 3.37%.

As with other post-Census studies, the CCM for 2010 shows “Census 2010” numbers that don’t quite jive with the previously-released Census 2010 number for total, occupied, and vacant units, which I think is because they reported Census 2010 results adjusted for “reinstated units.” (don’t ask!). However, as best as I can tell here is a table showing “official” Census housing units counts and “post-Census-study” estimates of housing units counts for Census 2010 and Census 2000.

	"Official" Census Housing Unit Counts (000's)
	2010	2000	Change
Total	131,705	115,905	15,800
Occupied	116,716	105,480	11,236
Vacant	14,988	10,425	4,563
Gross Vacancy Rate	11.38%	8.99%	2.39%
	"Adjusted" Census Housing Unit Counts (000's)
	2010	2000	Change
Total	132,466	116,586	15,880
Occupied	116,735	105,809	10,926
Vacant	15,732	10,778	4,954
Gross Vacancy Rate	11.88%	9.24%	2.63%

Based on the CCM results, Census 2010 understated the gross vacancy rate by about 0.5 percentage points. The CCM’s gross vacancy rate was higher than the Census 2010 GVR in all states save Alaska.

The CCM results also suggest that the US homeownership rate on April 1, 2010 was 65.2%, just a tad above the “official” estimate of 65.1%.

There’s a lot more in the report, available at http://2010.census.gov/news/pdf/g-05.pdf.

There are a couple of things worth noting. First, the higher estimate for 2010 housing units, combined with the 2000 HUCS results, suggest that the US housing stock from 4/1/2000 to 4/1/2010 increased by 15.880 million units. Other Census estimates (from surveys) suggest that housing completions plus manufactured housing put in place from April 2000 to March 2010 totaled about 16.734 million. That implies that the net loss in the housing stock to demolition, net conversions, and “other stuff” over that 10-year period by just 854,000, or 85,400 a year – an incredibly low number. I hope someone at Census plans to look at that.

Second, of course, the CCM suggests that official Census 2010 results understated gross vacancy rates, which suggests that estimates of the “excess” supply of housing on April 1, 2010 based on decennial Census results are “too low” – though, of course, adjusted estimates are still way below estimates using the obviously biased CPS/HVS data.

	Adjusted Decennial Census Measures
	1990	2000	2010
Gross Vacancy Rate	10.50%	9.20%	11.90%
Homeownership Rate	64.20%	66.10%	65.20%
	CPS/HVS Measures (first half average)
	1990	2000	2010
Gross Vacancy Rate	11.40%	11.70%	14.50%
Homeownership Rate	63.90%	67.20%	67.00%

CR Note: The calculated number of demolitions per year seems very low. As Lawler notes, I hope someone at the Census Bureau is looking into this. Also - this review suggests that estimates of excess vacant housing units as of April 1, 2010 were low.

by Calculated Risk on 5/24/2012 12:32:00 PM

• From the Kansas City Fed: Growth in Tenth District Manufacturing Eased Further but Activity Remained Expansionary

Growth in Tenth District manufacturing activity rebounded in May, and producers were more optimistic than in previous months. The majority of producers reported stable or increasing capital spending plans in the next six to twelve months, with very few anticipating a decrease. Most price indexes moderated, although more producers than in April plan to raise selling prices in future months.

The month-over-month composite index was 9 in May, up from 3 in April and equal to 9 in March ... In contrast, the employment index eased slightly from 12 to 8.

The regional manufacturing surveys have been mixed in May. The NY (Empire State) and Kansas City Fed surveys showed faster expansion, but the Richmond Fed showed slower expansion. And the Philly Fed survey showed contraction.

• Also for manufacturing, the new Markit Flash PMI showed slower expansion. From Markit: PMI falls to three-month low, signalling slower rate of manufacturing expansion

The May Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) indicated a solid improvement in U.S. manufacturing sector business conditions, according to the preliminary ‘flash’ reading which is based on around 85% of usual monthly replies. However, with the seasonally adjusted PMI falling from 56.0 in April to 53.9, the headline PMI nonetheless signalled the weakest expansion in three months.

This is the first release of the Flash PMI, and it has no track record of predicting the ISM number (the May report will be released June 1st).

• From Freddie Mac: Historic Lows for Fixed Mortgage Rates Hold Steady

Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing the record lows for average fixed mortgage rates holding steady for the week. The 30-year fixed-rate mortgage ticked slightly down to 3.78 percent and 15-year fixed-rate mortgages remained unchanged from last week at 3.04 percent.

30-year fixed-rate mortgage (FRM) averaged 3.78 percent with an average 0.8 point for the week ending May 24, 2012, down from last week when it averaged 3.79 percent. Last year at this time, the 30-year FRM averaged 4.60 percent.