RSS Feed by Calculated Risk on 9/12/2010 03:40:00 PM
Sunday, September 12, 2010
Schedule for Week of Sept 12th
The key releases this week will be retail sales (on Tues for August), Industrial Production (Weds for August) and the Empire state and Philly Fed surveys (Weds and Thurs for Sept).
Possibly on Monday (update: I've been told Tuesday): Ceridian-UCLA Pulse of Commerce Index™ This is the diesel fuel index for August (a measure of transportation).
CoreLogic House Price Index for July. This release could show the first signs of price declines in July, although the index is a weighted 3 month average for May, June and July.
No releases scheduled.
8:30 AM: Retail Sales for August. The consensus is for a 0.3% increase from July.
Early: NFIB Small Business Survey for August. This survey has been showing declining optimism in the small business sector.
10:00 AM: Manufacturing and Trade: Inventories and Sales for July. Consensus is for a 0.6% increase in inventories in July.
7:00 AM: The Mortgage Bankers Association (MBA) will release the mortgage purchase applications index. This index declined sharply following the expiration of the tax credit, and the index has only recovered slightly over the last few weeks - suggesting reported home sales in August and September will be weak.
8:30 AM: Empire Manufacturing Survey for Sept. The consensus is for a reading of 5.0, down from 7.1 in August. These regional surveys have been showing a slowdown in manufacturing and are being closely watched right now.
9:15 AM: Industrial Production and Capacity Utilization for August. The consensus is for a 0.2% increase in August.
8:30 AM: The initial weekly unemployment claims report will be released. Consensus is for a slight increase to 455K from 451K last week. Claims for nine states were estimated last week because of the holiday.
8:30 AM: Producer Price Index for August. The consensus is for a 0.3% increase in prices.
10:00 AM: Philly Fed Survey for September. This survey declined sharply over the last few months, and showed contraction last month for the first time since July 2009. The consensus is for an increase to 3.8 (slow expansion) from minus 7.7 in August.
8:30 AM: Consumer Price Index for August. The consensus is for a 0.3% increase in prices. This is being closely watched for further disinflation, and also because Q3 is the quarter the annual annual cost-of-living adjustment (COLA) is calculated for Social Security (probably no change in 2011).
9:55 AM: Reuters/University of Mich Consumer Sentiment preliminary for September. The consensus is for a slight increase to 70.0 from 68.9 in August.
12:00 PM: Q2 Flow of Funds Report from the Federal Reserve.
After 4:00 PM: The FDIC has only closed one bank over the last 3 weeks. The pace will probably pickup soon ...
Report: Bank regulators reach agreement on Basel III capital requirements
by Calculated Risk on 9/12/2010 12:18:00 PM
The details will be released later today, but here is an overview from the Financial Times: Regulators agree to reforms on bank capital
Basel III ... is expected to include a new minimum core tier one ratio for banks worldwide. ... The current minimum is 2 per cent.Here is an article from the WSJ: Bank Regulators Reach Deal on New Capital Rules
[The] proposal [was] for a new minimum of 4½ per cent [with] an additional buffer of 2½ per cent ... Banks within the buffer zone would face restrictions on their ability to pay dividends and discretionary bonuses.
excerpt with permission
The details will be released later, and the agreement is expected to be approved in November. This will probably lead to more banks raising capital.
Summary for Week ending Sept 11th
by Calculated Risk on 9/12/2010 09:00:00 AM
It was a light week for economic news ...
The Census Bureau reports:
[T]otal July exports of $153.3 billion and imports of $196.1 billion resulted in a goods and services deficit of $42.8 billion, down from $49.8 billion in June, revised.
Click on graph for larger image.The first graph shows the monthly U.S. exports and imports in dollars through June 2010.
Although imports declined in July, imports have been increasing much faster than exports.
The second graph shows the U.S. trade deficit, with and without petroleum, through July.
The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products.The decrease in the deficit in July was across the board, although the oil deficit only declined slightly. The trade gap with China declined slightly to $25.92 billion from $26.15 billion in June - essentially unchanged.
This is the 2nd largest monthly trade deficit since the 2008 collapse in trade.
The Federal Reserve reports:
In July, total consumer credit decreased at an annual rate of 1-3/4 percent. Revolving credit decreased at an annual rate of 6-1/4
percent, and nonrevolving credit increased at an annual rate of 1/2 percent.
This graph shows the increase in consumer credit since 1978. The amounts are nominal (not inflation adjusted).Revolving credit (credit card debt) is off 15.2% from the peak. Non-revolving debt (auto, furniture, and other loans) is off 1.1% from the peak. Note: Consumer credit does not include real estate debt.
Best wishes to all.
Saturday, September 11, 2010
OECD Paper: "The EU Stress Test and Sovereign Debt Exposures"
by Calculated Risk on 9/11/2010 07:52:00 PM
Here is a new paper on EU Sovereign debt exposures. (ht Mark Whitehouse at the WSJ: Number of the Week: Hiding Europe’s Unpleasant Details)
From Blundell-Wignall, A. and P. Slovik (2010), “The EU Stress Test and Sovereign Debt Exposures”
The EU-wide stress test did not include haircuts for sovereign debt held in the banking books of banks on the grounds that over the 2 years considered default is virtually impossible in the presence of the EFSF [European Financial Stability Facility Special Purpose Vehicle], which is certainly large enough to meet funding needs of the main countries of concern over that period.
The haircuts applied to the trading book in the stress test are shown in the first block of Table 1. The trading book exposures (not reported in the stress test paper) are also shown. The EU wide loss from the haircut is around €26. bn. The contribution of the 5 countries where most of the market focus has been (Greece, Portugal, Ireland, Italy and Spain) is only €14.4bn.
Click on table for larger image in new window.A different picture emerges when we consider the banking book. First it is important to note that the EU banking book sovereign exposures are very much larger than those of the trading book—around 83% of the total. If the same haircuts are applied to these exposures the loss amounts to €139bn, or 12% of the Tier 1 capital of the EU banks at the end of 2009 (and €165bn and over 14% of Tier 1 if trading book losses are added in). The haircuts of the 5 countries of market focus amount to €75.8bn in the banking book, and €90.2bn if the trading book amount is added in. This is around 8% of EU Tier 1 capital of stress tested banks.What happens in less than 2 years when the European Financial Stability Facility Special Purpose Vehicle is no longer providing funding?
...
This study has shown that most of the sovereign debt is held on the banking books of banks, whereas the EU stress test only considered their small trading book exposures. Sovereign debt held in the banking book cannot be ignored however. First, individual bank failures would see latent losses on the trading book realized, a fact that creditors and equity investors need to take into account. Second, and more importantly, the market is not prepared to give a zero probability to debt restructurings beyond the period of the stress test and/or the period after which the role of the EFSF SPV comes to an end. The main reasons for this are: the very large job ahead for fiscal consolidation in a period of weak economic growth; and the apparent difficulty of achieving structural/competitiveness reforms in some countries in a short period of time. The paper also showed that excessively exposed banks in principle can reduce their exposure by not re-financing maturing sovereign debt, with the government funding gap being met instead by the SPV. This would have the effect of transferring sovereign risk from the bank concerned to the public sector.
Paper: Housing and the Business Cycle
by Calculated Risk on 9/11/2010 03:05:00 PM
From Steven Gjerstad and Vernon Smith in the WSJ: Why We're in for a Long, Hard Economic Slog (ht MrM)
In the Great Depression and in every recession since, recovery of residential construction has preceded recovery in every other sector, and its recovery has been far larger in percentage terms than the recovery in any other major sector.This is something I've been writing about since I started the blog in 2005, but it is worth repeating ... even though Residential Investment usually only accounts for around 5% GDP, it isn't the size of the sector, but the contribution during the recovery that matters - and housing is usually the largest contributor to economic and employment growth early in a recovery.
Applied to the Great Recession, it appears that those who see signs of a recovery may be grasping at straws.
But not this time because of the large number of excess housing units.
Here is the paper from Steven Gjerstad and Vernon Smith: Household expenditure cycles and economic cycles, 1920 – 2010
This has key implications for policy. As an example, a policy (like the housing tax credit) that encourages adding to the housing stock (new home construction) is a clear mistake, whereas policies that are aimed at household creation (jobs) or at least household preservation (like extended unemployment benefits) make more sense. Also policies aimed at supporting house prices - keeping the price above the market clearing price - are counterproductive and also a mistake.
Early Review of Byron Wien's "Ten Surprises" List for 2010
by Calculated Risk on 9/11/2010 11:49:00 AM
I saw this article at CNBC yesterday: Outlook Gloomy at Secret Billionaire Meeting
For 25 years, legendary Wall Street strategist Byron Wien, now with The Blackstone Group, has held summer meetings with high net worth individuals to get their outlook on the global economy and investing. This year’s group, totaling fifty individuals and including more than 10 billionaires, was decidedly pessimistic on the U.S. economy ...That reminded me to check on Byron Wien's The Surprises of 2010 list.
Note: For anyone not familiar with the list, Wien tries to make predictions that are generally out of the consensus view - he has been doing this for 24 years, and usually gets more than half right.
It looks like this will be an off year for the "Surprises" list ...
A quick review of Wien's possible surprises:
1. The United States economy grows at a stronger than expected 5% real rate during the year and the unemployment level drops below 9%. ...
CR: Not Likely.
2. The Federal Reserve decides the economy is strong enough for them to move away from zero interest rate policy. In a series of successive hikes beginning in the second quarter the Federal funds rate reaches 2% by year-end.
CR: Not Gonna Happen.
3. Heavy borrowing by the U.S. Treasury and some reluctance by foreign central banks to keep buying notes and bonds drives the yield on the 10-year Treasury above 5.5%. ...
CR: Not Gonna Happen
4. In a roller coaster year the Standard and Poor’s 500 rallies to 1300 in the first half and then runs out of steam and declines to 1000, ending where it started at 1115.10. ...
CR: Missed on the high, but the general idea of a trading range has been correct so far.
5. Because it is significantly undervalued on a purchasing power parity basis, the dollar rallies against the yen and the euro. It exceeds 100 on the yen and the euro drops below $1.30 as the long slide of the greenback is interrupted.
CR: Right on the euro, wrong on the yen.
6. Japan stands out as the best performing major industrialized market in the world as its currency weakens and its exports improve. Investors focus on the attractive valuations of dozens of medium sized companies in a market selling at one quarter of its 1989 high. The Nikkei 225 rises above 12,000
CR: The Nikkei did rally to 11,200 before falling sharply, but I think this counts as a miss.
7. Believing he must be a leader in climate control initiatives, President Obama endorses legislation favorable for nuclear power development. ...
CR: Didn't happen.
8. The improvement in the U.S. economy energizes the Obama administration. The White House undergoes some reorganization and regains its momentum. ...
CR: Not likely this year.
9. When it finally passes, financial service legislation, like the health care bill, proves to be softer on the industry than originally feared. ...
CR: I think this was right.
10. Civil unrest in Iran reaches a crescendo. Ayatollah Khomeini pushes out Mahmoud Ahmadinejad in favor of a more public relations adept leader. Economic improvement becomes the key issue and anti-Israel rhetoric subsides.
CR: Sounds good, but very unlikely.
2009 was Wien's best year (he reviews 2009 here), but it looks like 2010 will be his worst.
