NEW$ & VIEW$ (10 JULY 2013)

HIGHER RATES DO IMPACT THE ECONOMY

 

Interest rates on fixed 30-year mortgages rose for the ninth week in a row to average 4.68 percent in the week ended July 5, the Mortgage Bankers Association said. It was the highest level since July 2011 and a 10 basis point increase over the week before.

The surge in costs has been expected to push some undecided buyers into the market as they rush to lock in rates before they rise even more, but MBA’s seasonally adjusted gauge of loan requests for home purchases fell 3.1 percent, the second straight week of declines.

The Purchase Index decreased 3 percent from one week earlier.

  • And this from NBF Financial:

Mortgage refinancing activity has provided significant relief to U.S. households in the past year by reducing debt-servicing costs. We note that the drop in the effective mortgage rate between Q1 2012 and Q1 2013 was responsible for most of the $52 billion saving in interest payments. Unfortunately, the recent surge in interest rates has led to a precipitous decline in refinancing activity.

As today’s Hot Chart shows, volume applications for refis fell to a two-year low last week. We think that there is more downside potential in the weeks ahead. That’s because the recent backup in the 30-year mortgage has pushed the market rate (currently at 4.61% according to bankrate.com) above the effective interest rate on mortgage debt currently outstanding. As shown, this is the first such occurrence in almost five years (autumn of 2008).

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Surprised smile  Just a reminder!

 

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SLOW AND SLOWER

 

China Trade Data Show Weakness

China posted a surprise Confused smile drop in exports in June amid slack global demand, revealing further weakness in a driver of growth for the world’s second-largest economy.

China’s key export sector shrank 3.1% in June compared with a year earlier, down from 1% year-on-year growth in May and the first contraction in a non-holiday month since the height of the financial crisis in November 2009. Imports fell 0.7% year-on-year, pointing to weak demand at home as well as abroad.

Exports to a debt-ridden Europe slumped 8.3% year-on-year in June, and sales to the U.S. were down 5.4%.

Coming after a raft of disappointing data in April and May, June’s weak trade results add to fears that economic growth in the second quarter has continued to slow. (…)

Even as growth edges perilously close to the government’s 7.5% target for the year, Mr. Li — who holds the reins on China’s economic policy – reiterated his commitment to steer clear of any fresh stimulus.

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FT Alphaville has this chart:

China June 2013 trade from 2005 - SocGen

And this one from Bloomberg Briefs’ Michael McDonough:

china gdp forecast chart

IMF View Hits Emerging Markets Investor fears that the end of easy money is at hand are ricocheting around the globe. In the latest fallout, the International Monetary Fund trimmed its global-growth forecast.

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China Sneezes, U.S. Shrugs From the perspective of the U.S., a slower China is arguably a good thing.

(…) America’s exposure to Chinese demand is limited. Goldman Sachs calculates that companies in the S&P 500 directly attribute a mere 5% of revenue to emerging markets, and just 1% to China.

That might understate the figure somewhat, as companies break down revenue into catch-all overseas categories such as Asia-Pacific that might include China along with Japan and others. And while China isn’t the biggest chunk of revenue, it has been an important source of revenue growth. Still, U.S. shares have mostly performed well over the past two years while China’s stumble has played out, a sign China’s influence on U.S. companies is muted, at least compared with the impact of the Fed’s stimulus.

Meanwhile, a slowing China means lower global demand and more room for the Fed to keep the monetary taps open. Import costs from China, America’s biggest supplier of overseas goods, actually fell 1% in the year ending May. (…)

And as the world’s leading importer of oil, iron ore and copper, a booming China has a way of inflating everyone else’s input costs. With China’s new leaders pushing for an end to the building boom, the opposite is true, with many key commodities, especially metals, well below their highs. ‪That’s good for U.S. consumers and companies that rely on raw materials. (…)

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S&P Cuts Italy Rating

S&P lowered Italy’s rating to BBB, two levels above junk territory, from BBB+. The outlook is negative.

The ratings firm said its downgrade reflects its view of a further worsening of Italy’s economic prospects coming on top of a decade of stagnation, where real growth averaged a negative 0.04%.

S&P noted that Italy’s economic output in the first quarter was 8% lower than in the last quarter of 2007 and continues to fall.

The firm lowered its gross domestic product forecast for the year to negative 1.9%, down from a negative 1.4% forecast in March and a forecast for 0.5% growth in December 2011.

S&P expects 2013 per capita GDP will be an estimated €25,000 ($33,000), which is somewhat below 2007 levels.

S&P said Italy’s low growth stems in large part from rigidities in the country’s labor and product markets. (…)

The firm expects net general government debt—at 129% of GDP as of the end of 2013—to be among the highest of all rated sovereigns. (…)

Italy’s Industrial Output Rises Less Than Forecast in May

Production rose 0.1 percent from April, when it fell 0.3 percent, national statistics office Istat said in Rome today. In May, output fell an annual 4.2 percent on a workday-adjusted basis, Istat said. (Chart from BMO Capital)

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French Industrial Output Declines Less Than Forecast: Economy

French production declined 0.4 percent after a 2.2 percent surge in April, national statistics office Insee said in Paris today.

French manufacturing output has gained 0.6 percent over the past three months, bolstered by a 5 percent increase in production of transport materials and a 8.1 percent jump in refining, Insee said.

High five That was for May. Here’s the June preview courtesy of Markit:

Latest data signalled an easing of the downturn in the French manufacturing sector during June. The headline Purchasing Managers’ Index® (PMI®) registered 48.4, up from 46.4 in May. Although remaining below the 50.0 mark for a sixteenth consecutive month, the latest index reading was the highest in this sequence.

Boosting the level of the PMI in June were slower declines in both output and new orders. The latest drop in production was only modest, reflecting a similar easing in the pace of contraction of new work to the weakest since February 2012. This was despite export sales decreasing at a slightly faster rate. Meanwhile, backlogs of work at French manufacturers remained broadly unchanged in June.

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EARNINGS WATCH

The dollar’s strength against the yen, euro and Venezuelan bolivar is contributing to a projected 1 percent decline in second-quarter earnings for nonfinancial companies in the Standard & Poor’s 500 Index, the second-worst performance since 2009. Analysts see at least three more quarters of weakening for the yen and euro, cutting the dollar value of goods from Tiffany & Co. trinkets to Delta Air Lines Inc. tickets sold overseas. (…)

The yen has weakened by about 21 percent against the dollar since Oct. 31, when Japanese Prime Minister Shinzo Abe started a campaign to lower the currency to spur the country’s economy. The euro declined 6.3 percent since Feb. 1, and Venezuela devalued the bolivar by 32 percent on Feb. 8 in its government’s fifth such move in nine years.

Companies with most of their sales outside the U.S. were hurt most, based on the estimates compiled by Bloomberg. Per-share earnings sank an average 17 percent on a 3.5 percent sales drop among about two dozen S&P 500 firms that get at least half their revenue in the Asia-Pacific region. (…)

More on that from NBF Financial:

The likeliest headwind on top-line will come from foreign markets, where sales of S&P 500 companies generate about one-third of their profits. In Q1, receipts from the rest of the world of all U.S. corporations were down 2.9% from Q4, a decline that explains much of the weakness in overall revenues. The evidence available for Q2 suggests continued softness. As today’s Hot Chart shows, two months into the quarter U.S. export prices were down 4% annualized from Q1, a weakness exacerbated by USD appreciation. Though import prices were also softer, U.S. terms of trade (the ratio of export to import prices) were still down 1% on the quarter, the weakest showing in 1½ years.

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Rising rates are typically a boon for banks because they increase the amount that they can earn on their loans. They often also accompany an improving economy, raising the potential volumes. But in the run-up to second-quarter earnings, which kick off on Friday, concern has arisen about the effect that rising rates will have on banks’ securities holdings. For now at least, most investors seem to fall into the pro camp. But they would be advised to remember that there is more to banking than interest rates and securities holdings.

 

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