new home sales, median household income, greek fin min comments, rail data, kc fed

Another weak number but no surprise as last month’s was suspect on the high side.

nhs-mar
Highlights
One day up, one day down is a fit description for recent housing data. Last week’s declines in housing starts & permits were a surprising blow to the outlook, reversed in part by yesterday’s very strong report on existing home sales. But today it’s bad news again as new home sales fell a very steep 11.4 percent to a 481,000 annual rate.

The bulk of the decline came in the largest region, the South, where sales fell 15.8 percent. The drop here does follow a 9.3 percent gain in the prior month but the latest result is not good news for the region’s builders. Also contributing to the decline was the Northeast, but sales in this region are very small, as well as the West, a much larger region where sales were down 3.4 percent. Sales in the Midwest rose 5.9 percent in the month.

More new homes actually came onto the market in March, up 4,000 to 213,000 nationwide, but supply relative to sales rose sharply because of the drop in sales, to 5.3 months from 4.6 months. This reading, however, is still pretty thin and won’t scale back builder plans.

Softness in sales is confirmed by price data where the median price fell 1.5 percent to $277,400. Year-on-year, the median price is down 1.7 percent while sales are up 19.4 percent, a discrepancy that points to price discounting by builders.

March 2015 New Home Sales Are Having a Rough Ride. Four Month Decline in New Home Prices.

By John Lounsbury and Steven Hansen

The headlines say new home sales significantly declined from last month. This whole data series is suspect because of the significant backward revisions, a roller coaster of good months and bad months, and obvious seasonality issues. HOWEVER, the rolling averages smooth out much of the garbage produced in this series – and there was an insignificant improvement in the rolling averages. There is a continuing decline in new home prices.

Median Household Income Lower in March 2015

(Sentier Research) — According to new data derived from the monthly Current Population Survey (CPS), median annual household income in March 2015 was $54,203, about 0.8 percent lower than the February 2015 median of $54,639. The Sentier Household Income Index for March 2015 was 95.4 (January 2000 = 100).
median-hhi

From the Greek finance minister- reads like they accept the austerity in general so will likely get funded by the EU and move on to more of same:

None of this means that common ground cannot be achieved immediately. The Greek government wants a fiscal-consolidation path that makes sense, and we want reforms that all sides believe are important. Our task is to convince our partners that our undertakings are strategic, rather than tactical, and that our logic is sound. Their task is to let go of an approach that has failed.

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Redbook retail sales, Greece comment

Hopefully it bounces back:

Redbook
redbook-4-18-table
Highlights
This year’s Easter shift, from late in April last year to early in April this year, is greatly distorting store sale comparisons. Redbook’s same-store year-on-year tally is up only 0.8 percent in the April 18 week following the prior week’s 1.1 percent rate which was also distorted by the calendar effect. When these distortions pass, store sales will likely return to their 3.0 to 3.5 percent pace.

This chart is for a full month last year vs this year. Remember, lower gas prices are supposed to increase sales:
redbook-monthly-yoy

ECB’s Constancio: default no reason to quit euro as Greece cash pinch worsens

By John O’Donnell and Jonathan Gould

April 19 (Reuters) — “If a default will happen … the legislation does not allow that a country that has a default … can be expelled from the euro,” ECB VP Vitor Constancio told the European Parliament, saying that Greek banks had been told not to increase their exposure to the state to avoid “a possible credit event regarding the state”. “Capital controls can only be introduced if the Greek government requests,” he said, adding that they should be temporary and exceptional. “As you saw in the case of Cyprus, capital controls did not imply getting out of the euro.”

Euro update and anecdotal econ news

This gives you a pretty good idea of the magnitude of euro selling by central banks. The question is when are they finished, and perhaps, when foreign exporters again pressure their cb’s to increase holdings to target the euro zone for exports, which is the reason the cb’s originally bought the euro.

And note that the current account surpluses indicate the EU may be through the ‘j curve’ as net exports continue to move higher with the foreign cb induced currency depreciation.

Of course QE and negative rates continue to work to strengthen the euro, as the does the current account surplus, so it’s just a matter of time before the fundamentals overtake CB selling. The problem is timing… ;)

Euro’s Reserve Status Jeopardized as Central Banks Dump Holdings

By Kevin Buckland David Goodman

April 10 (Bloomberg) — Quantitative easing may be helping Europe achieve its economic targets, but it’s also undermining the long-term viability of the euro by tarnishing its allure as a global reserve currency.

Central banks cut their euro holdings by the most on record last year in anticipation of losses tied to unprecedented stimulus. The euro now accounts for just 22 percent of worldwide reserves, down from 28 percent before the region’s debt crisis five years ago, while dollar and yen holdings have both climbed, the latest data from the International Monetary Fund show.

“As a reserve currency, the euro is falling apart,” said Daniel Fermon, a strategist at Societe Generale SA in Paris. “As long as you have full quantitative easing, there’s no need to invest. The problem for the moment is we don’t see a floor for the currency. Money’s flowing out.”

European Central Bank President Mario Draghi has in the past welcomed the drop-off in reserve managers’ holdings because a weaker exchange rate makes the continent more competitive. Yet firms including Mizuho Bank Ltd. warn the currency’s waning popularity reflects a more lasting loss of confidence in an economy that shrank in two of the past three years.

Sinking Economically

The decline in euro reserves suggests other central banks consider the ECB’s 1.1 trillion euros ($1.2 trillion) of QE bond purchases, which started a month ago, to be the biggest threat to the currency’s global status since its 1999 debut.

Greece’s debt woes aren’t helping, either. The ECB ramped up the emergency funding available to Greek banks Thursday to alleviate the country’s worsening liquidity issues amid drawn-out negotiations over its bailout.

Outright Sales

National Australia Bank Ltd. estimates reserve managers sold at least $100 billion-worth of euros in the fourth quarter of 2014.

“Most of the fall in the euro share represented outright selling of euros” rather than simply reflecting declines in the exchange rate, said Ray Attrill, the bank’s global co-head of currency strategy in Sydney.

Of the $6.1 trillion of reserves for which central banks specify a currency, the proportion of euros fell in every quarter of 2014, IMF data show. Last year was also the first time euro holdings fell in cash terms.

Euro Weakening

Yen holdings increased in three of the four quarters and make up 4 percent of the total, up from as low as 2.8 percent in early 2009. Dollars account for the biggest proportion at 63 percent after reserve managers increased their holdings in the final six months of last year. That’s down from as much as 73 percent in 2001.

The changes came as the yen and euro each sank 12 percent versus the greenback last year. The euro has tumbled about the same amount since then, which should further shrink its presence in central banks’ war chests.

The euro’s also falling against its broader peers, dropping more than 7 percent this year among a basket of its Group of 10 nations tracked by Bloomberg Correlation-Weighted Indexes, the biggest decline in the group. The dollar climbed almost 7 percent on the prospect of higher U.S. interest rates, beating a gain of about 6 percent in the yen.

EU current account:
eu-current-account

wholesale-originations

NACM’s Credit Managers Index Drops Even Further in March

The March report of the Credit Managers’ Index (CMI) from the National Association of Credit Management (NACM) fell further this month indicating that some serious financial stress is manifesting in the data.

“We now know that the readings of last month were not a fluke or some temporary aberration that could be marked off as something related to the weather,” said NACM Economist Chris Kuehl. “These readings are as low as they have been since the recession started and to see everything start to get back on track would take a substantial reversal at this stage.”

The combined score of 51.2 is moving dangerously close to contraction zone. The index of favorable factors dropped to 55.4 while the unfavorable factors drastically fell to 48.5–a place this index has not seen since after the end of the recession. “The signal this sends is that many companies are not nearly as healthy as it has been assumed and that there is considerably less resilience in the business sector than assumed,” said Kuehl.

Most categories showed decreases this month, but the real damage occurred in the unfavorable changes categories. According to Kuehl, the most disturbing drop happened in the rejection of credit applications category, which fell from 48.1 to an even weaker 42.9. The accounts placed for collection fell to 49.8, disputes improved slightly to 49, dollar amount beyond terms fell to 45.5, and dollar amount of customer deductions dropped to 48.7.

Rail Week Ending 04 April 2015: Weakness Continues

(Econintersect) — Week 13 of 2015 shows same week total rail traffic (from same week one year ago) again declined according to the Association of American Railroads (AAR) traffic data. Intermodal traffic, which accounts for half of movements, is growing year-over-year – but weekly railcar counts remain in contraction. Rail traffic remains surprisingly weak.

Baltic Dry Index is Now Below the Great Recession Low

By: John O’Donnell

April 11 (Econintersect) — The Baltic Dry Index is considered a coincident and leading indicator for global economic growth. It tracks the cost of shipping bulk commodities around the world. The BDI is now below the level reached during the Great Recession.
35358334baltic.Dry.Index

Comments on DB research

I send my posts to both a mailing list and to my blog, www.moslereconomics.com, where they are posted for public viewing.

To get on the mailing list you must make a donation to the annual Pan Mass Challenge bicycle ride, which donates 100% of donations to Dana Farber in Boston, the world’s leading cancer research center. This year the donation is expected to exceed $45 million of 75% unrestricted funding critical to continue to developing the latest treatments and cures.

So let me again thank those who donated last year, and thanks in advance for donating again this year,
and I also welcome in advance all new donors who will be added to my mailing list!

Best to all!
Warren

Deutsche Bank – Fixed Income Research

Special Report – Euroglut here to stay: trillions of outflows to go
10 March 2015 (9 pages/ 370 kb)

Last year we introduced the Euroglut concept: the idea that the Euro-area’s huge current account surplus reflects a very large pool of excess savings that will have a major impact on global asset prices for the rest of this decade. Combined with ECB quantitative easing and negative rates we argued that this surplus of savings would lead to large-scale capital flight from Europe causing a collapse in the euro and exceptionally depressed global bond yields.

This is indeed strange- the notion that a current account surplus causes currency depreciation?

The current account surplus, in general, is evidence of restrictive fiscal policy that constrains domestic demand, including domestic demand for imports, along with depressing wages which adds to ‘competitiveness’ of EU exporters. Normally, however, this causes currency appreciation that works against increased net exports, unless the govt buys fx reserves. But this time it’s been different, as ECB policies and uncertainty surrounding Greece and related political events have managed to frighten global portfolio managers into doing the shifting out of euro financial assets in sufficient size to cause the euro to fall, particularly vs the $US, giving a further boost net EU exports.

With European portfolio outflows currently running at record highs, this piece now asks: Can outflows continue? How big will they be? The answer to this question is critical: the greater the European outflows, the more the euro can weaken and the lower global bond yields can stay.

Again, this is a very strange assertion, as exporters selling the dollars earned from their exports for euro needed to pay their domestic expenses in fact drain net euro financial assets from the global economy.

What can happen is that speculation and portfolio shifting can be associated with agents borrowing euro or depleting ‘savings’ which they sell for dollars, for example, to accomplish their desired currency weightings. And these new euro borrowings and savings reductions do indeed create new euro deposits for the purpose of selling them, which drives down the value of the euro as previously discussed. This leaves those selling euro for dollars either ‘short’ euro vs dollars, or underweight euro financial assets in their portfolios.

However, at some point the drop in the euro that makes EU real goods and services less expensive for Americans to import, and at the same time makes US goods and service more expensive for EU members, can cause EU net exports to increase. That is, Americans buy imports with their dollars, and the EU exporter then sells those dollars to get euro to pay their EU based production costs, and generally keep their net profits in euro as well. That is, EU exports to the US are facilitated by exporters selling dollars for euro, which is the opposite of what the speculators and portfolio managers are doing.

To review the process, speculators and portfolio managers sell euro for dollars driving the euro down to the point where the EU exporters are selling that many dollars for euro, all as the exchange rate continuously adjust as it expresses ‘indifference levels’.

And should the speculation and portfolio shifting drive the euro down far enough such that the net export activity is attempting to sell more dollars for euro than the speculators and portfolio managers desire, the evidence will be a reversal in the exchange rate as the dollar then falls vs the euro.

We answer the outflows question by modeling the Euro-area’s net international investment position (NIIP). We argue that Europeans now have to become net creditors to the rest of the world and that the NIIP needs to rise from -10% of GDP to at least 30%. We estimate that this adjustment requires net capital outflows of at least 4 trillion euros.

No ‘net capital inflow’ is needed for the EU to lend euro. As always, it’s a matter of ‘loans create deposits’. That is, the euro borrowings as I described create euro deposits as I described. The notion that borrowing comes from ‘available funds’ is entirely inapplicable with the floating exchange rate policies of the dollar and the euro.

This conclusion leads to three investment implications.

First, we continue to expect broad-based euro weakness.

They were right about that!

I say it’s from portfolio shifting and speculation desires exceeding the trade flows, even as restrictive fiscal policy and now currency depreciation from portfolio shifting and speculation has caused an acceleration of net exports.

They say it’s from a pool of ‘excess savings’.

European outflows have been even bigger than our initial (high) expectations, so we are revising our EUR/USD forecasts lower. We now foresee a move down to 1.00 by the end of the year, 90cents by 2016 and a new cycle low of 85cents by 2017.

It’s very possible, if the portfolio shifting and speculation continues to grow faster than the EU’s current account surplus grows. However, should the growing current account surplus ‘overtake’ the desired portfolio shifting and speculation, the euro will reverse and appreciate continuously until it gets high enough for the current account surplus to fall to desired portfolio and speculative fx weightings.

Second, we expect continued European inflows into foreign assets, particularly fixed income. Our earlier work demonstrated that the primary destination of European outflows will be core fixed income markets in the rest of the world, and evidence over the last few months supports these trends: most European outflows have gone to the US, UK and Canada. These flows should keep global yield curves low and flat.

Yes, to the extent that euro portfolios desire to shift to dollar financial assets due to the interest rate differential the shift can continue. However, history and theory tells us this is limited as the desire to take exchange rate risk is limited. Euro portfolios are most often matched with euro liabilities, and so shifting to dollar financial assets can result in substantial euro shortfalls should the exchange rate shift adversely. In fact, many portfolios, if not most, including the banking system, are in some way legally prohibited from exchange rate risk exposure.

Finally, we see Euroglut as continuing to constrain monetary policy across the European continent for the foreseeable future. Since our paper in September central banks in Switzerland, Norway, Sweden, Denmark, the Czech Republic and Poland have all eased.

Except this ‘easing’ is in the form of lower interest rates, which is effectively a fiscal tightening as govts pay less interest to the non govt sectors, which in fact works to make the euro stronger. Likewise, the deflationary forces unleashed by restrictive fiscal policy likewise imparts a strong euro bias.

These countries run large current account surpluses.

Yes, a force that generates currency appreciation as previously described.

This is why, once the shifting and speculation has run its course, I expect the euro to appreciate continuously until it gets high enough to again reverse the trade flows from surplus to deficit.

Feel free to distribute.

Through a unique mix of huge excess savings and structurally low yields, the entire European continent will continue to be a major source of global imbalances for the rest of this decade.

eur/usd

Warren, euro continue to go down vs usd. Do you think draghi goal is to reach eur/usd 1:1 ?

Good question!

No one thinks the ECB is buying dollars so if that’s the case the world is getting short euros directly and indirectly in very large size, as per the EU trade surplus, which is a consequence of the overall increases in ‘competitiveness’ as wages are depressed by fiscal policy. It’s all part of the ‘purchasing power parity’ shift with the EU becoming the low cost producer. And these forces all work to make the euro very strong once the ‘portfolio shifting’ has run its course, which it hasn’t yet.

What’s happened with the euro is the same thing that happened with the USD- markets feared QE would be inflationary and cause currency depreciation, so they discounted that in advance of QE, depressing the dollar. And when it didn’t happen and QE ended, the dollar reversed as those caught short and those who had become underweight in dollars had to restore their dollar exposures.

So while portfolios with dollar liabilities that had reduced dollar exposure were returning to dollars, at the same time the ECB was moving towards negative rates and QE, causing portfolios to reduce euro exposures, driving the euro lower. And events surrounding Greece and Ukraine only added to euro fears, further driving portfolio managers to shift exposure away from euro.

What I can’t tell you is when the tide will turn, but looks to me that when it does, the euro goes up until the trade surplus reverses, and since the link between the rising euro and the trade balance is ‘loose’ the euro could easily get very high vs the dollar- say, over 1.5- before that happens.

To answer your question, what Draghi is doing- negative rates and QE, fundamentally makes the euro stronger, but he believes, as do market participants, that it makes the euro weaker. Same with the Fed, of course, as market participants believe higher rates are dollar friendly when in fact fundamentally they weaken it. So while Draghi may be targeting 1:1 as you suggest, and taking measures he believes and markets believe will get him there, in fact he and markets are ‘pushing on a spring’ as fundamentally net euro are being drained rather than added to the global economy.

What this also suggests is the next EU crisis could be that of the strong euro as it appreciates and starts hurting EU export industries, and the ECB just keeps doing more and more QE and cuts rate further which only makes it all worse.

Greece, Euro inflation

Greece gets to choose its own poison:

Greece Delays Awaited Reform Proposals Until Tuesday

Feb 23 (WSJ) — Greece’s government pushed back until early Tuesday a list of awaited reforms that its eurozone partners had demanded in exchange for continuing to fund the country for another few months. Greek officials said late Monday that the list would be sent the following morning, past the original midnight deadline. Eurozone finance ministers are due to review the proposed reforms during a conference call Tuesday afternoon. “We are still expecting the list today, but if it comes at 6 a.m. tomorrow morning then that’s OK for us,” said a European Union official in Brussels. The important thing, the official added, was for the measures to comply with the terms of Greece’s bailout program and that the proposals arrive ahead of Tuesday afternoon’s teleconference.

Greece submits reform proposals to creditors

By Holly Ellyatt

Feb 1 (CNBC) — Greece’s Finance Minister Yanis Varoufakis sent a list of reform proposals to the euro zone at around midnight on Monday, just making a deadline set by its international creditors.

A Greek government source confirmed that the reform measures were sent to the Eurogroup of euro zone finance ministers for approval. They will also need to be approved by the so-called “troika” overseeing the country’s bailout, made up of the International Monetary Fund, European Commission and European Central Bank.

A source close to the European Commission said they were “encouraged” by Greece’s “strong commitment” to combat tax evasion and corruption, Reuters reported. These were among the proposals according to a list released by the Greek government’s press office.

“In the Commission’s view, this list is sufficiently comprehensive to be a valid starting point for a successful conclusion of the review,” the source said, according to Reuters.

Other proposals included pledges to reform tax policy, consolidate pension funds and to eliminate incentives for early retirement. In addition, the proposals include plans to review and control public spending, and commitments not to roll back privatizations that have been completed.

Euro inflation even with the weak euro!

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Greek bank liquidity, Fed minutes, Architecture Billings Index

As previously discussed, and relayed to the finance minister in Greece, there is no reason to assume the ECB will cut off liquidity to Greek banks.

First, those banks are private institutions, and regulated and supervised by the ECB, who has deemed them ‘solvent’ and ‘adequately capitalized’ and therefore eligible for liquidity support as members in good standing.

Think of it this way, if NY went rogue, would the Fed cut off Citibank?

ECB extends liquity for Greek banks: Report

Seems the last thing the Fed wants to do now is engineer higher mtg rates and set back the anemic housing markets.

Sort of like Bernanke did just before housing turned south and has yet to recover…

Federal Reserve minutes indicate no rush to raise interest rates

Below 50, not good:

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RT interview, UK inflation, retail sales mystery, Greece, Italian trade surplus

Greece must threaten Grexit to get best outcome from Troika

Edward talks to Warren Mosler, chairman of Consulier Engineering on why the EU’s approach to the Greek debt crisis has failed to lift the Greek …

So for decades the BOJ has tried to create inflation and failed, for 7 years the Fed has tried and failed, the ECB has tried and failed, etc. etc. etc. Maybe it’s not so easy for a CB to create inflation? Or impossible…;)

UK inflation hits lowest level since records began

Abe hopes BOJ keeps stimulus to meet inflation goal, upbeat on economy

Feb 16 (Reuters) — Abe hopes BOJ keeps stimulus to meet inflation goal, upbeat on economy (Reuters) Japanese Prime Minister Shinzo Abe said on Monday praised the BOJ’s aggressive stimulus program for helping revive the economy and wipe out the public’s “sticky deflationary mindset.” “I hope the BOJ continues to steadily proceed with bold monetary easing to achieve 2 percent inflation,”

No consideration that the lower prices in the first instance only shift income from sellers of oil to buyers of oil:

Even excluding gas, retail spending was flat last month after ticking down 0.2% in December. The retail restraint is somewhat surprising given that the average household is expected to save hundreds of dollars this year on gas that averaged $2.23 a gallonon Thursday, down from $3.32 a year ago, according to the AAA.

Greece demands a credible growth package:

“No more loans — not until we have a credible plan for growing the economy in order to repay those loans, help the middle class get back on its feet and address the hideous humanitarian crisis.” YV

Italy : Merchandise Trade
it-trade
Highlights
The seasonally adjusted trade balance returned a sizeable E5.1 billion surplus in December following a slightly larger revised E3.8 billion excess in November.

December’s sharp improvement was mainly attributable to a 2.6 percent monthly bounce in exports, their fourth increase in the last five months, which easily more than reversed a 1.1 percent mid-quarter drop. Outside of durable consumer goods all of the major sectors saw solid monthly gains and total exports were up 6.3 percent from their level in December 2013.

However, weak domestic demand and lower oil costs were also once again a factor in the expansion of the black ink. Hence, imports were down 1.6 percent versus December (minus 0.5 percent ex-energy), their third straight month of decline. Compared with a year ago, purchases from overseas were off 1.3 percent.

Having hit a low of E-4.1 billion in March 2011 the turnaround in the Italian trade balance has been sharp and quite steady. Net exports probably provided a useful boost to economic growth last quarter and look likely to play a key role in any sustained upswing in 2015.

mtg purchase apps down again, Earnings, Greece chart, gasoline demand

Not good. Purchase apps back down to depressed levels after a dip in front of govt mortgage fee cuts followed by a small blip up after the cuts, and up only 1% from last year’s cold winter depressed levels:

MBA Purchase Applications
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Highlights
The purchase index fell 7.0 percent in the February 6 week for the 4th straight fall but still remains in the plus column on a year-on-year basis, but only by plus 1.0 percent. The refinance index, which unlike the purchase index has been showing life, fell back 10.0 percent in the week. Rates have been very low but did move higher in the week, up 5 basis points to an average 3.84 percent for conforming loans ($417,000 or less).

mba-purch-2-6-graph
Earnings note:

4Q14 earnings season is winding down and growth is slowing. After running close to +5% on a YoY basis, S&P operating earnings growth is now down to 3.5% and revenue growth is down to 1.3%
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Gasoline demand down this week but may be moving up slightly vs last year but hard to say underlying demand is higher given last year’s extra cold winter
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