by Calculated Risk on 9/06/2011 09:33:00 PM

Some analysis from Kash Mansori: Swiss FAQs. Excerpts:

6. Will the announced exchange rate floor of 1.20 CHF/euro be modified?
It's possible, and in fact, the announcement by the SNB indicated that they would like the CHF to weaken further over time. This is a very sensible strategy by the SNB, and I wouldn't be surprised if they soon make an explicit promise to gradually ratchet up the exchange rate from 1.20. The reason is because only by promising investors that their CHF portfolio will suffer exchange rate losses over time can the SNB really do something to staunch the flow of funds into Switzerland -- a fixed exchange rate of 1.20 won't do it. The SNB will probably give it a little time to see if the flow of funds into Switzerland slows as a result of today's action, but if it doesn't, then look for the SNB to set a gradually rising target exchange rate going forward.

7. How will this affect the eurozone?
That depends in part on what the SNB decides to do with all of those euro it will be accumulating. Some reports suggest that the SNB (typically cautious) had decided to only buy German and French government bonds with those euro, and not bonds from other eurozone countries. That will have the effect of exacerbating the interest rate differentials between the eurozone core and periphery, potentially making things worse. It would be reasonable to interpret this as indicating that the SNB believes that there's a good chance that eurozone is going to lose the periphery countries.

Alternatively, the SNB could decide to place a bet on the survival of the eurozone, or at least on continued Spanish and Italian inclusion. If so, then it could help to make that positive outcome happen by using some of its growing stash of euros to buy Spanish and Italian government bonds. Not only would this directly help to narrow interest rate spreads between the core and periphery, but it would be interpreted by the markets as a major vote of confidence.

by Calculated Risk on 9/06/2011 06:18:00 PM

Since I haven't posted this in some time - from Doug Short: S&P 500 Snapshot: Cliff Dive and Partial Recovery


This graph (click on graph for larger image) from Doug Short shows the wild market swings over the last few weeks.

by Calculated Risk on 9/06/2011 01:35:00 PM

From Jon Lansner at the O.C. Register: Sellers rush to pull homes off O.C. market

The latest Orange County home inventory report from local broker Steve Thomas — data as of September 1 [shows] sellers quit the market in droves.

As more homeowners throw in the towel with the realization that the best time of the year to sell has now passed, the inventory continues to steadily drop. Last year at this time the inventory was still growing, continuing right through September. Not this year. Over the past month, the inventory has shed a total of 349 homes and now totals 10,754, dropping below the 11,000 mark and reaching levels not seen since March. In the last two weeks alone, the inventory dropped by 297 homes, the largest drop so far this year. Last year there were 963 more homes on the market compared to today. In transitioning into the fall market, expect more homeowners to throw the proverbial towel. This will continue through the end of the year.

It is normal for inventory to decline as the summer ends, so this decline is mostly seasonal. However, not mentioned in the article, is that this is an 8.2% decline from the same period in 2010.

I've been using the HousingTracker / DeptofNumbers data that Tom Lawler mentioned back in June to track inventory. Ben at deptofnumbers.com is tracking the aggregate monthly inventory for 54 metro areas.

Click on graph for larger image in graph gallery.

This graph shows the NAR estimate of existing home inventory through July (left axis) and the HousingTracker data for the 54 metro areas through early September. The HousingTracker data shows a steeper decline in inventory over the last few years (the NAR will probably revise down their inventory estimates this fall).

The second graph shows the year-over-year change in inventory for both the NAR and HousingTracker.

HousingTracker reported that the early September listings - for the 54 metro areas - declined 16.5% from last September. Of course there is a large percentage of distressed inventory, and various categories of "shadow inventory" too. But this is a significant year-over-year decline and pretty soon we will be talking about inventory being at the lowest level since 2005 (inventory increased sharply near the end of 2005 signaling the end of the housing bubble).

by Calculated Risk on 9/06/2011 10:00:00 AM

The August ISM Non-manufacturing index was at 53.5%, up from 52.7% in July. The employment index decreased in August to 51.6%, down from 52.5% in July. Note: Above 50 indicates expansion, below 50 contraction.

From the Institute for Supply Management: August 2011 Non-Manufacturing ISM Report On Business®

Economic activity in the non-manufacturing sector grew in August for the 21st consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.

The report was issued today by Anthony Nieves, C.P.M., CFPM, chair of the Institute for Supply Management™ Non-Manufacturing Business Survey Committee. "The NMI registered 53.3 percent in August, 0.6 percentage point higher than the 52.7 percent registered in July, and indicating continued growth at a slightly faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index decreased 0.5 percentage point to 55.6 percent, reflecting growth for the 25th consecutive month, but at a slower rate than in July. The New Orders Index increased by 1.1 percentage points to 52.8 percent. The Employment Index decreased 0.9 percentage point to 51.6 percent, indicating growth in employment for the 12th consecutive month, but at a slower rate than in July. The Prices Index increased 7.6 percentage points to 64.2 percent, indicating that prices increased at a faster rate in August when compared to July. According to the NMI, 10 non-manufacturing industries reported growth in August. Respondents' comments remain mixed. There is a degree of uncertainty concerning business conditions for the balance of the year."
emphasis added

Click on graph for larger image in graph gallery.

This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index.

This was above the consensus forecast of 50.5% and indicates slightly faster expansion in August than in July.

by Calculated Risk on 9/06/2011 08:44:00 AM

This is a strongly worded statement from the SNB: Swiss National Bank sets minimum exchange rate at CHF 1.20 per euro

The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development.

The Swiss National Bank (SNB) is therefore aiming for a substantial and sustained weakening of the Swiss franc. With immediate effect, it will no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.

Even at a rate of CHF 1.20 per euro, the Swiss franc is still high and should continue to weaken over time. If the economic outlook and deflationary risks so require, the SNB will take further measures.

The FT Alphaville has several posts about this move, including The clairvoyant Jim O’Neill and SNB euroquake, the analyst reaction – part one and SNB euroquake, the analyst reaction – part two.

by Calculated Risk on 9/05/2011 10:42:00 PM

The European markets declined sharply on Monday. The DAX was off 5.3%, the FTSE 100 off 3.6%.

From the WSJ: Europe Signals Global Gloom

[This is] a pivotal week that includes the European Central Bank's monthly decision on interest rates and a decision by a German court on the legality of Germany's participation in Europe's €440 billion ($625 billion) rescue fund.

The ECB purchased Italian and Spanish government bonds Monday in a bid to keep 10-year borrowing costs from rising further above 5% ... The ECB has purchased over €50 billion in bonds since reactivating the program four weeks ago.

And from the NY Times: Europeans Talk of Sharp Change in Fiscal Affairs

The idea is to create a central financial authority — with powers in areas like taxation, bond issuance and budget approval — that could eventually turn the euro zone into something resembling a United States of Europe.
...
Nothing happens quickly in Europe, however. For the most part, such efforts are still being made behind the scenes.
...
The idea of a European Treasury that would enforce fiscal discipline on wayward countries ... Those in prosperous nations like Germany do not want to see their taxes used to bail out countries that borrowed their way into trouble. And those in weaker nations are reluctant to allow outsiders to dictate how their governments spend their money and tax their citizens.

The Asian markets are red tonight with the Nikkei down over 1%.

From CNBC: Pre-Market Data and Bloomberg futures: the S&P 500 is down about 28 points, and Dow futures are down about 250 points.

Oil: WTI futures are down to $84 and Brent is up to $110.

by Calculated Risk on 9/05/2011 04:02:00 PM

With the unemployment rate at 9.1% and almost 14 million Americans unemployed, with the alternate measure of unemployment (U-6) at 16.2%, with 6 million workers unemployed for more than 6 months, and with 6.9 million fewer payroll jobs than at the beginning of the 2007 recession, one might think every major publication would lead with a labor story on Labor Day. One would be wrong.

A quick glance shows zero labor stories on the front page on the NY Times - or on the Business page. Zero. Zip. Zilch. Nada.

LA Times? Same story - no stories.

The WSJ? One story, sort of. Infrastructure Likely Part Of Obama Jobs Push

President Barack Obama signaled Monday he'll propose a major infrastructure program and an extension of a payroll tax break in the jobs speech he planned to deliver Thursday before a joint session of Congress.

The WaPo? A few opinion pieces.

CNBC? You guessed it. Zip.

Here is a new survey: Out of Work and Losing Hope: The Misery and Bleak Expectations of American Workers (ht Ann)

The unemployed are pessimistic about the prospects of an economic recovery, and have gotten more so over time. In August 2009, 56% thought that the economy would begin to recover within two years. Now, two years later, only 29% think the economy will begin to recover in the next two years. Another 30% are thinking in a time frame of three to five years, leaving 42% that believe that economic recovery is more than five years down the road. This is a strong statement about the likelihood of recovery: almost three quarters of the unemployed do not see an economic recovery even in the space of the next two years.

Misery. Bleak expectations. And almost no labor stories ... on Labor Day.

by Calculated Risk on 9/05/2011 11:55:00 AM

The graph below shows the number of total construction payroll jobs in the U.S., including both residential and non-residential, since 1969.

Construction employment is down 2.2 million jobs from the peak in April 2006, but up slightly this year (through the August BLS report).

Unfortunately this graph is a combination of both residential and non-residential construction employment. The BLS only started breaking out residential construction employment fairly recently (residential building employees in 1985, and residential specialty trade contractors in 2001).

Click on graph for larger image in graph gallery.

Mostly moving sideways ...

Usually residential investment (and residential construction) lead the economy out of recession, and non-residential construction usually lags the economy. Because this graph is a blend, it masks the usual pickup in residential construction following previous recessions. Of course residential investment didn't lead the economy this time because of the huge overhang of existing housing units.

This table below shows the annual change in construction jobs (total, residential and non-residential) and through August for 2011.

	Annual Change in Payroll jobs (000s)
Year	Total Construction Jobs	Residential Construction Jobs	Non-Residential
2002	-85	88	-173
2003	127	161	-34
2004	290	230	60
2005	416	268	148
2006	152	-62	214
2007	-198	-273	75
2008	-787	-510	-277
2009	-1053	-431	-622
2010	-149	-113	-36
Through August 2011	26	14	12

After five consecutive years of job losses for residential construction (and four years for total construction), this is a baby step in the right direction. However there will not be a strong increase in residential construction until the excess supply of housing is absorbed.

In addition residential investment has made a positive contribution to GDP so far this year for the first time since 2005. A small contribution - but a positive one.

by Calculated Risk on 9/05/2011 08:50:00 AM

From the Telegraph: "Eurozone service sector [slowed] and the Purchasing Managers Index figures show services activity slowed to its lowest rate since September 2009. The eurozone PMI figure slipped to 51.5 in August, down from 51.6 in July."

"The [U.K.] guage of services activity, which makes up the biggest part of the British economy and includes shops and restaurants, fell to 51.1 in August from 55.4 in July"

From the WSJ: U.S. Lawsuit Pressures Bank Shares

Shares in U.K. and European banks slumped Monday after several institutions were named in a lawsuit Friday alleging they sold risky home loans to U.S. housing agencies Fannie Mae and Freddie Mac.

The suit by the Federal Housing Finance Agency in New York and Connecticut courts alleged that units of 17 banks including Royal Bank of Scotland Group PLC, Barclays PLC, HSBC Holdings PLC, Deutsche Bank AG, Credit Suisse AG and Société Générale SA, misrepresented the risks of $196 billion in home mortgage-loan securities sold to the agencies in a four-year period, making it the largest legal action by a federal regulator over the mortgage meltdown.

The Greek 2 year yield is at 49.99%!

Here is a graph of the 10 year spread (Italy to Germany) from Bloomberg. And for Spain to Germany. The Italian spread is at 365, most of the way back up to the high of 389 on Aug 4th, and the Spanish spread is at 330, still down from 398 on Aug 4th. Most of the increase in the spread is because the German 10 year yield is at 1.9%. (The U.S. Ten Year is slightly under 2% too).

The Portuguese 2 year yield is up to 13.6%. Also the Irish 2 year yield is at 8.5%.

Here are the links for bond yields for several countries (source: Bloomberg):

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

by Calculated Risk on 9/05/2011 12:12:00 AM

A couple of points from the WSJ: Euro Falls on Greece Worries

Rival [German] parties gained fresh support in the elections Sunday, piling further pressure on [Chancellor Angela] Merkel ... the loss of regional influence comes as Merkel's party prepares for a much-anticipated vote in the German parliament at the end of the month on changes to the euro-zone's temporary bailout mechanism.
...
The news follows Friday's suspension of talks between the Greek government and representatives of the International Monetary Fund, European Central Bank and European Commission over new bailout funds.

And from Reuters: German court to rule on Sept 7 on euro,Greek bailouts

Germany's constitutional court will announce its verdict on September 7 on whether the government broke the law with last year's euro zone and Greek bailout packages, it said in a statement on Tuesday.

It is unlikely the court will rule against the bailout, but Merkel is losing political support. It appears the changes to the bailout mechanism will pass the German parliament, but the vote might be close.

The European crisis is heating up again ...