>
>    On Tue, Mar 11, 2008 at 7:52 AM, Dave Vealey wrote:
>
>    1 yr bill auction in Italy looks to have failed to get enough bids for
>    paper. Avg yield was 3.80% and high yield was 4.50%….
>
>    DV
>
Not good! This is where the real systemic risk lies, as previously discussed.
| Survey | 0.5% |
| Actual | 0.8% |
| Prior | 1.1% |
| Revised | n.a |
Looking to see if there’s any inventory building in Q1 after the big fall off in Q4 after the run up in Q3 etc…
You can save about 100 bps by waiting for the extended limits for jumbos to kick in:
Hurdles for Jumbo Borrowers
by Jennifer Woods
For starters, if you’re looking in certain high-cost metropolitan areas such as New York, Los Angeles, Boston or San Francisco, you may want to sit tight for a few weeks.
That’s because a measure in the fiscal stimulus package recently signed into law by President Bush that will temporarily change the guidelines on what constitutes a jumbo mortgage.
As it stands, mortgages above $417,000 on single-family homes are considered “jumbo” , or non-conforming, in that they are not backed by federal mortgage entities, and carry higher rates than conforming mortgages which are below $417,000.
The new bill, however, allows that amount to be bumped up — in some areas to as much as about $729,750. The actual guidelines were set March 6 by the Department of Housing and Urban Development.
“It makes huge sense to wait [for the guidelines to be determined] said Fenton Soliz, president and chief executive of Mortgage Experts. “You might qualify for substantially more money at a lower rate,” he said.
The current average for a 30-year fixed mortgage is 5.90 percent, compared to 6.88 percent for a 30-year fixed jumbo mortgage.
This is all part of the effort of non-residents to no longer accumulate $70 billion per month of US financial assets.
The USD goes down as they try to sell USD to each other at lower and lower prices and doesn’t stop until levels are reached where it makes sense to spend the USD here. That’s the only way the net accumulation can be reduced.
Here is BMW is buying US labor content in parts and finished products.
The US has become a substantial and growing auto exporter.
Exports continue to pick up much of the slack from the housing market, as GDP muddles through.
And the Fed thinks this is a good thing. Bernanke stated in from of Congress that he’d like to see exports and investment (in export businesses) drive US GDP rather than consumption.
If the trade gap goes to zero, trade could be adding about another 2% to US demand/GDP.
BMW plans to increase US production while cutting workers in Germany
by Page Ivey
On one side of the Atlantic Ocean, BMW says it will cut 7.5 percent of its work force over two years. On this side of the water, the company says it plans to increase production by more than 50 percent by 2012.
“This is completely driven by the plunge in the dollar,” said Greg Gardner with Oliver Wyman, publisher of the Harbour Report on automotive manufacturing activity. “It is untenable to produce at a much higher cost in Germany.”
The euro climbed to record heights Friday, reaching $1.5463 before falling back to $1.5335 in late trading after the Federal Reserve announced it would provide more cash to banks that need it. That means European goods cost more for Americans to buy.
By building the cars in the U.S., BMW can save money on the lower dollar and on wages since its South Carolina workers make less than German workers, Gardner said.
The declining dollar also means BMW and other foreign automakers likely will start buying locally for more of the parts used by their U.S. plants, he said.
Even with crude prices now well over $100 there’s no sign of demand for Saudi crude falling off. I expect they will continue to act as swing producer, setting price and letting quantity adjust, until a large enough supply response forces their production down below 7 million bpd.
| Survey | 23K |
| Actual | -63K |
| Prior | -17K |
| Revised | -22K |
| Survey | 5.0% |
| Actual | 4.8% |
| Prior | 4.9% |
| Revised | n/a |
The longer term chart is definitely looking lower/weaker, but not yet at recession levels, and is not ‘population adjusted.’
This give the Fed no comfort regarding inflation concerns.
The output gap is may already too low to bring inflation down, and their forecasts are for a (modest) pickup in growth when the fiscal package kicks in beginning early May.
In their models, it’s the forecast of rising unemployment that is responsible for the slack that brings inflation back into comfort zones.
Today’s 4.8% unemployment number is a step in the wrong direction for that to happen.
| Survey | -25K |
| Actual | -52K |
| Prior | -28K |
| Revised | -31K |
Manufacturing employment falls indefinitely in a modern economy.
| Survey | 0.3% |
| Actual | 0.3% |
| Prior | 0.2% |
| Revised | 0.3% |
The Fed wants these to remain reasonably well-contained.
| Survey | 3.6% |
| Actual | 3.7% |
| Prior | 3.7% |
| Revised | n/a |
As above.
| Survey | 33.7 |
| Actual | 33.7 |
| Prior | 33.7 |
| Revised | n/a |
Down a tad.
Coming soon!
| Survey | $7.0B |
| Actual | — |
| Prior | $4.5B |
| Revised | — |
[comments]
U.S. Feb payrolls drop for second straight month
by Glenn Somerville
U.S. employers cut payrolls for a second straight month during February, slashing 63,000 jobs for the biggest monthly job decline in nearly five years as the labor market weakened steadily, a government report on Friday showed.
The Labor Department said last month’s cut in jobs followed an upwardly revised loss of 22,000 jobs in January instead of 17,000 reported a month ago. In addition, it said that only 41,000 jobs were created in December, half the 82,000 originally reported.
December was first reported as a ‘very weak’ 17,000 increase, revised to up 82,000 a month later (not ‘as originally reported’ as above) and now further revised to up 41,000.
These are substantial swings with current market sensitivities, and January and February will likely be further revised next month.
At the same time, the unemployment rate fell to 4.8%. The previous increases corresponded to an unexpected jump in the labor force participation rate, which has now fallen back some in line with Fed expectations.
The Fed has long been anticipating that demographic forces would reduce the labor force participation rate and thereby tighten the labor markets.
That is, we are running out of people to hire; so, new hires fall while the unemployment rate stays the same or goes down.
The last several months are consistent with this outlook, and it means the output gap isn’t all that large, as 4.75% unemployment is deemed by the Fed to be full employment with anything less further driving up inflation.
All this makes things more difficult for the Fed:
Without a major net supply response (a 5+ million bdp jump in crude or crude substitutes or drop in demand), crude prices will likely continue to rise. The drop in net demand for OPEC crude that cuased the price to break was about 15 million bdp in the 1980s, for example.
Yellen: Fed faces unpleasant mix on prices, growth
by Ros Krasny
CHICAGO (Reuters) – San Francisco Federal Reserve Bank President Janet Yellen said on Friday that the U.S. central bank faces an “unpleasant combination” of risks to inflation and growth in setting interest rate policy.
“The U.S. economy is particularly exposed to downside risks from the unwinding of the housing bubble and disruptions in financial markets,” Yellen said in remarks prepared for Banque de France’s symposium on globalization and monetary policy in Paris.
“There is some slack now in the U.S. labor market and, if these downside economic risks materialize, quite a bit more slack could emerge,” she said, which would tend to dampen inflation.
The dove position: OK to cut now because inflation coming down later anyway.
Still, Yellen said inflation risks were “roughly balanced” and that the Fed “cannot afford to take for granted that inflation expectations will remain well-anchored.”
The hawk position: if you let inflation expectations elevate (and there are signs this is happening), it’s too late, and a much larger output gap is needed to bring it back down.
While Fisher is perhaps the most hawkish voting member and voted against Bernanke at the last meeting, continuously rising crude/food prices and a not so large output gap are causing more voting members to firm their anti-inflation rhetoric in recent weeks:
Fisher Says Credit Markets May Not Force Fed to Act
by Naga Munchetty and Scott Lanman
(Bloomberg) Federal Reserve Bank of Dallas President Richard Fisher said investors shouldn’t assume that rising credit costs will force the central bank to cut interest rates as deeply as it did in January or in an emergency meeting.
“We reacted with very deliberate actions that took place over a very short timeframe” in January, Fisher said in an interview with Bloomberg Television in Paris. “That shouldn’t lead markets to expectations that we will continue to react in that manner.”
Fisher also downplayed speculation that the Fed is set to reduce its benchmark interest rate before policy makers’ next scheduled session on March 18. Yesterday, yields on agency mortgage-backed securities rose to a 22-year high relative to U.S. Treasuries, while the cost to protect corporate bonds from default climbed to a record.
“I would discourage you from thinking that simply because of a significant action in the credit markets, like we had yesterday, that suddenly we’re going to have an Open Market Committee meeting, and that suddenly we’re going to move Fed funds rates in response,” said Fisher. “It doesn’t work that way.”
Traders see a 100 percent chance that the Fed will lower its 3 percent benchmark rate by three-quarters of a percentage point this month, according to futures contracts. The probability a month ago of such a move was 30 percent.
`Process’ Turmoil
At the same time, Fisher said that the credit-market turmoil “has to be processed.”
That is, the Fed is more inclined to give markets time to work things out. While demand is weak, the output gap has remained modest.
And now, with inflation and inflation expectations elevated, they need a larger output gap to bring it down (rising MNOG).
The world’s 45 biggest banks and securities firms have written off $181 billion since the beginning of 2007, reflecting the collapse of the U.S. subprime-mortgage market.
Without a failure, so far, and without the feared supply-side constraints. Yes, credit standards have tightened, but not due to actual ‘money shortages’.
“There’s a danger if the Fed reacts to new information immediately,” said Fisher, 58, a former money manager and U.S. Senate candidate who joined the Dallas Fed in 2005. “But obviously we take into account all the information as closely as we can.”
Fed officials have cut the target for the overnight interbank lending rate by 2.25 percentage points since August, taking it to 3 percent. The 1.25 percentage point of reductions in January was the fastest easing of policy in two decades. Yields on two-year Treasuries fell to 1.41 percent at 11:55 a.m., the lowest since 2003, as traders anticipate further cuts.
Fisher was the lone voting member of the Federal Open Market Committee who dissented from the Jan. 30 decision to reduce the rate by a half point.
Jobs Report
The FOMC’s decisions in January were in response to a “weaker prospect for the economy,” Fisher said.
Which is why he voted against it. When the risks shifted from ‘market functioning induced collapse’ to ‘slowing demand/weaker GDP/larger output gap’, he stepped aside.
The U.S. Commerce Department releases February payroll- growth and unemployment figures at 8:30 a.m. Washington time today. The jobless rate probably rose to a two-year high and payrolls increased at a quarter of last year’s pace as builders and manufacturers fired more workers, economists said before the report.
A modestly larger output gap is expected. Fisher and others aren’t so sure that it will be large enough to bring down the rate of inflation, as it’s still going up even with current weakness.
Yes, inflation is a lagging indicator, but oil prices are a leading indicator and drive future inflation for years down the road.
Fisher was in Paris for a conference on globalization, inflation and monetary policy, hosted by France’s central bank. In a speech before the interview, Fisher said “persistent” increases in commodity prices make it harder for central bankers to determine precisely how much inflation may be rising.
Exactly. And so far, the rate cuts are seen to have been driving down the dollar, driving up crude prices and future inflation, and not doing a whole lot for market functioning.
European News Highlights:
| ECB’s Weber Sees `Little’ Room to Cut Interest Rates |
rising MNOG (minimum noninflationary output gap) as inflation rises at current levels of GDP. (see below.)
| ECB’s Noyer Says Globalization Has `Ceased’ to Curb Inflation |
import prices are rising there even with the strong euro, implying if the euro wasn’t as strong import prices would be that much higher.
| Euro Strength Reduces ECB’s Surplus |
US beggar thy neighbor policy is robbing demand from the eurozone
| German Industrial Output Rises, Led by Construction |
| Italian Light Commercial Vehicle Sales Climb 14% in February |
If GDP holds up with inflation this high and rising, the ECB then has to engineer a larger output gap.
ECB’s Weber Sees `Little’ Room to Cut Interest Rates
by Simone Meier and Gabi Thesing
(Bloomberg) European Central Bank council member Axel Weber said the bank has little room to lower interest rates with the economy operating near full capacity and oil prices at a record.
“The output gap is such that it doesn’t give me a lot of comfort that it will lead to a strong disinflationary effect in the period to come,” Weber told reporters in Oslo today. Coupled with external price shocks such as surging oil and food prices, “there is very little room to maneuver.”
The ECB yesterday kept its main lending rate at a six-year high of 4 percent to curb inflation even as the euro’s appreciation and slower U.S. expansion threaten to curb economic growth. Weber said today that there’s an “unusual amount of uncertainty” on both the outlook for growth and inflation.
“The current policy stance in the euro area has to be judged as contributing to achieving our medium-term objective of price stability,” Weber said. “Weaker growth prospects do not pose sufficient reason to expect a damping of inflationary pressures in the foreseeable future.”
The ECB yesterday revised up its inflation forecast for this year to about 2.9 percent, which would be the highest annual average rate since 1993, according to International Monetary Fund figures. The bank also predicted inflation would average about 2.1 percent in 2009, breaching its 2 percent limit for a 10th year.
“Due to increases in unit wage costs, core inflation rates are projected to equally exceed the 2 percent margin over the course of 2008,” Weber, who is also president of Germany’s Bundesbank, said. “And even taking into account a forecast horizon beyond 2008 gives no sign for relief.”
Weber said the bank will “do what is necessary” to quell inflation risks.
Economic growth in the 15-nation euro region will show a “gradual recovery toward potential rates” of around 2 percent in the second half of 2008, he said.
And, of course, that’s a bad thing when inflation is too high to begin with.
