by Calculated Risk on 3/18/2013 10:05:00 AM

The National Association of Home Builders (NAHB) reported the housing market index (HMI) decreased 2 points in March to 44. Any number under 50 indicates that more builders view sales conditions as poor than good.

From the NAHB: Builder Confidence Slips Two Notches in March

Builder confidence in the market for newly built, single-family homes paused for a third consecutive month in March, with a two-point reduction to 44 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today.
...
“In addition to tight credit and below-price appraisals, home building is beginning to suffer growth pains as the infrastructure that supports it tries to re-establish itself,” explained NAHB Chief Economist David Crowe. “During the Great Recession, the industry lost home building firms, building material production capacity, workers who retreated to other sectors and the pipeline of developed lots. The road to a housing recovery will be a bumpy one until these issues are addressed, but in the meantime, builders are much more optimistic today than they were at this time last year.”
...
While the HMI component gauging current sales conditions declined four points to 47, the component gauging sales expectations in the next six months and the component gauging traffic of prospective buyers both posted gains, of one point to 51 and three points to 35, respectively, in March.

Three-month moving averages for each region’s HMI score were also mixed, with the Northeast holding unchanged at 39, the Midwest and South posting one-point declines to 47 and 46, respectively, and the West registering a four-point increase to 58.

Click on graph for larger image.

This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the March release for the HMI and the January data for starts (February housing starts will be released tomorrow). This was below the consensus estimate of a reading of 47.

by Calculated Risk on 3/18/2013 08:43:00 AM

From the WSJ: Cyprus Postpones Debate on Deposit-Tax Proposal

The Cypriot parliament is now scheduled to meet Tuesday at 1600 GMT ... The government is also in discussion with its creditors to ease the burden on small depositors. ... The new proposal will see smaller depositors, those with up to €100,000, taxed at 3%; savers with €100,000 to €500,000 taxed at 10%; and those with over €500,000 taxed at 15%, one official said.

The Russians are not happy, from the Financial Times: Russia attacks Cyprus bailout plan

Mr Putin ... was among several Russian leaders to criticise the bailout, which came without consultation with Moscow and could cost Russian depositors up to €2bn ...
...
“We had an agreement with our EU colleagues that we would take co-ordinated action,” Mr Siluanov pRussia’s finance minister] said. “Our role was to possibly relax the terms for [Cyprus] paying back its credit. As it turns out, the EU took action to levy a tax on deposits, without consulting Russia, and for this reason we will further consider the issue of our participation from the point of view of restructuring the earlier loan.”
excerpt with permission

From Bloomberg: Euro Officials Pressing for Cyprus Bank Levy Signal Flexibility

While demanding that the levy raise the targeted 5.8 billion euros ($7.6 billion), finance officials said easing the cost to smaller savers was up to Cyprus. ... “If the government wants to change the structure of the solidarity levy for the banking sector, the government can decide as such,” European Central Bank Executive Board member Joerg Asmussen said today in Berlin. “What’s important is that the planned revenue of 5.8 billion euros remain.”

by Calculated Risk on 3/17/2013 10:25:00 PM

Monday economic releases:
• At 10:00 AM ET, the March NAHB homebuilder survey will be released. The consensus is for a reading of 47, up from 46 in February. Although this index has increased sharply in 2012, any number below 50 still indicates that more builders view sales conditions as poor than good.

• Also at 10:00 AM, the Regional and State Employment and Unemployment report for January 2013.

Weekend:
• Summary for Week Ending March 15th
• Schedule for Week of March 17th
• FOMC Projections Preview

The Asian markets are red tonight with the Nikkei down 1.9%, and Shanghai Composite down 0.5%.

From CNBC: Pre-Market Data and Bloomberg futures: the S&P futures are down 19 and Dow futures are down 130 (fair value).

Oil prices are down a little with WTI futures at $92.23 per barrel and Brent at $108.41 per barrel.

Below is a graph from Gasbuddy.com for nationwide gasoline prices. Nationally prices are down about 8 cents over the last month after increasing more than 50 cents per gallon from the low last December.

If you click on "show crude oil prices", the graph displays oil prices for WTI, not Brent; gasoline prices in most of the U.S. are impacted more by Brent prices.

Orange County Historical Gas Price Charts Provided by GasBuddy.com

by Calculated Risk on 3/17/2013 04:00:00 PM

Update: There is a plan to revise the deposit tax, from Matina Stevis "Exclusive: plans to revise #cyprus deposit tax on wires: under 5% for €0-100k, under 10% for €100-500k, around 13% for €500k+"

A must read account of the Cyprus negotiations by Peter Spiegel at the Financial Times: Cyprus depositors’ fate sealed in Berlin

The European Central Bank had another shock for [Cyprus’s new president Nicos Anastasiades]: the island’s second-largest bank, Laiki, was in such bad shape that it no longer qualified for the eurosystem’s emergency liquidity assistance ... The message ... meant that if no deal was reached, Laiki would collapse ... saddling Nicosia with a €30bn bill to reimburse accounts covered by the country’s deposit guarantee scheme. It was money Nicosia did not have. All of the island’s account holders would be wiped out.

So basically the offer was: accept a levy on depositors or all depositors would be wiped out.

A couple of interesting posts from Pawelmorski, Cyprus: A Brutal Lesson in RealPolitik and Cyprus: What Were They Thinking? and some other notes. "Don’t need a European bailout in a German election year"

From the WSJ: Cyprus Races to Prevent Bank Crisis

Uncertain it has the votes to pass the measure, Cyprus's government postponed an emergency parliamentary session on Sunday that had been called to vote on the levy, while the cabinet petitioned the central bank to extend Monday's bank holiday by at least another day, a move that was likely. ...

Anastasiades—sworn into office just a little over two weeks ago—directly controls 20 seats in Parliament through his center-right Democratic Rally party. He is supported by the Democratic Party with eight seats as well as the European Party with two seats and third environmental party—which has balked at the levy-with another one seat.

To pass, the measure must have at least 28 votes in Cyprus's 56-seat Parliament, with a tie vote going to the government under Cypriot parliamentary rules. But with some coalition lawmakers wavering, others demanding some sort of compensation for deposit holders, and at least one parliamentarian currently out of the country and unable to vote, passage is by no means assured.

A final comment: This points out several problems with deposit insurance (especially since Cyprus doesn't have their own currency). First, if the largest Cyprus banks failed, all depositors would be wiped out (in effect, there really isn't any deposit insurance from Cyprus). Second, in the US, problem banks are restricted on the interest rate they can pay on insured deposits (to avoid weak banks trying to draw in deposits by offering excessively high yields). As a few people have noted, Cyprus banks have been paying very high interest rates on deposits. I found a 5 year jumbo CD yielding 11% per year. To solve these problems they really need Euro Zone wide deposit insurance and to restrict yields on insured deposits held by problem banks.

by Calculated Risk on 3/17/2013 11:34:00 AM

The FOMC meets on Tuesday and Wednesday of the coming week.  I expect no policy change following the FOMC meeting, with the Fed continuing to purchase $85 billion in longer-term Treasury and agency mortgage-backed securities per month. I also expect the forward guidance thresholds will remain unchanged.

However, in recognition of recent data, I do expect a modest upgrade to the FOMC statement and quarterly economic projections, while recognizing certain downside risks (sequestration budget cuts, Cyprus bailout and depositor levy, Italian election uncertainty, and other international issues).

In the press conference, Fed Chairman Ben Bernanke will probably be asked about the Cyprus bailout, how the "sequestration budget cuts" impact the outlook, the sustainability of the recent economic pickup, what “substantial improvement” in the labor market means, and about tapering off the asset purchases later this year. I expect Bernanke's comments to be cautious, to argue we still need to see "substantial improvement" in the labor market, to note the downside risks to the economy, and to argue any pickup in inflation is transitory. He will also repeat that the benefits of QE outweigh the costs, and the Fed has the tools to exit the current highly accommodative policy.

Looking at the December FOMC statement, the first sentence will be changed:

"Information received since the Federal Open Market Committee met in December suggests that growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors."

This will probably be upgraded to something like "economic activity has resumed expansion at a moderate pace in recent months".

On inflation, the FOMC will probably repeat this sentence from the December meeting:

"Inflation recently picked up somewhat, reflecting higher energy prices. Longer-term inflation expectations have remained stable."

On the projections, it looks like GDP might be upgraded slightly, inflation will be close to the December FOMC projections, and the projections for the unemployment rate will probably be lowered again.

GDP projections of Federal Reserve Governors and Reserve Bank presidents
Change in Real GDP1	2013	2014	2015
Dec 2012 Meeting Projections	2.3 to 3.0	3.0 to 3.5	3.0 to 3.7

¹ Projections of change in real GDP and in inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.

I expect the FOMC will revise up slightly their 2013 and 2014 GDP forecasts.  We might see a wider range for GDP in 2013 based on how each participant weighs the downside risks.

The unemployment rate was at 7.7% in February.  This has already fallen to the top range of the December projections, and suggests the unemployment rate projections for 2013, 2014 and 2015 will be revised down.

Unemployment projections of Federal Reserve Governors and Reserve Bank presidents
Unemployment Rate2	2013	2014	2015
Dec 2012 Meeting Projections	7.4 to 7.7	6.8 to 7.3	6.0 to 6.6

² Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.

Both measures of inflation will be close to the December projections, and I expect the forecasts for  inflation will show the FOMC is still not concerned about inflation going forward.

Inflation projections of Federal Reserve Governors and Reserve Bank presidents
PCE Inflation1	2013	2014	2015
Dec 2012 Meeting Projections	1.3 to 2.0	1.5 to 2.0	1.7 to 2.0

Here is core inflation:

Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents
Core Inflation1	2013	2014	2015
Dec 2012 Meeting Projections	1.6 to 1.9	1.6 to 2.0	1.8 to 2.0

Conclusion: I expect no change to policy at this meeting, but a slight upgrade to the economic outlook while noting the downside risks.  I think it is too early for a change in the size of the monthly QE purchases.    On projections, I expect GDP to be revised up slightly for 2013, and the unemployment rate to be revised lower.