NEW$ & VIEW$ (20 DECEMBER 2013)

The Fed is actively engaged in a communication blitz to convince investors that tapering is no big deal.

Fed’s Mortgage Role Expands The central bank’s asset purchases are a bigger share of the market as it begins to taper its bond-buying program.

(…) Because bond production has tumbled, the Fed’s share of total mortgage-bond purchases has risen significantly over the past three months.

The Fed bought about 90% of new, eligible mortgage-bond issuance in November, up from roughly two-thirds of such bonds earlier this year, according to data from J.P. Morgan Chase & Co. The Fed’s large role in the mortgage market means that even as it reduces its bond purchases, the market could enjoy considerable support from the central bank in the near term.

Well, we’ll see how things go as the elephant in the room is trying to back up through the front door.

Mortgage rates stood at 4.6% last week for the average 30-year, fixed-rate mortgage, according to the Mortgage Bankers Association. Rates had been as low as 3.6% in May.

The yield on the 10-year Treasury note, a key driver of trading in mortgage markets, hit a three-month high Thursday at 2.923%. (…)

The Fed’s plan to purchase at least $35 billion in mortgage securities in January compares with market-wide net mortgage-bond issuance of about $18 billion a month in recent months, said Mr. Jozoff. (…)

Despite taking initial steps to reduce its asset purchases, the Fed “will be still expanding our holdings of longer-term securities at a rapid pace,” said Federal Reserve Chairman Ben Bernanke at a news conference on Wednesday. “We’re not doing less,” Mr. Bernanke said. “I would dispute the idea that we’re not providing a lot of accommodation to the economy.” (…)

Mortgage applications fell to a 13-year low last week, a sign that mortgage volumes could remain low for now. (…)

Even Markit plays the Fed’s tune: Fed tapers as outlook improves, removing one more global economic uncertainty

Something that many overlooked – especially back in May, when talk of taper first appeared – is that the taper is not a tightening policy. It is merely a reduction in the pace at which the central bank is pumping money in to the financial markets. That total, which has been growing at $85bn every month since the Fed embarked on its third wave of Quantitative easing 15 months ago, will instead grow by $75bn per month from January onwards.

Ask any junky what happens during tapering (see Withdrawal Syndrom)

Remember, we are all parts of this huge experiment.

By the way:

 

  • U.S. Existing Home Sales Down 4.3% Sales of previously owned homes slipped to the lowest level in nearly a year in November, signaling that higher mortgage rates are making buyers wary.

Existing-home sales decreased 4.3% from the prior month to a seasonally adjusted annual rate of 4.9 million, the National Association of Realtors said Thursday. Home sales fell by 1.2% from a year earlier, the first time in 29 months the year-over-year figure declined. (Chart from ZeroHedge)

  • From National Bank Financial:

The US housing market is facing some headwinds as evidenced by existing home sales which, in November, fell to the lowest since late 2012. The slump shouldn’t be entirely surprising considering the decline in
mortgage loans, the latter on pace to contract in Q4 at the fastest pace since 2011. Rising long rates partly explain why mortgage loans are drying up, but bad credit among one important segment of the population can also be having a detrimental effect.

Indeed the youth seem to be finding it difficult to qualify for loans
due to the lack of job opportunities but also due to bad credit. Note the disproportionate increase in student loan delinquencies in recent years.

And as today’s Hot Charts show, that may explain why the homeownership rate among the youth has dropped in recent years at a faster pace than that of any other age segment. So, barring new government measures to help address student debt and delinquencies, it may take longer for the housing market to fully recover from the crash that triggered the Great Recession. That’s one of the reasons why we expect home price inflation in 2014 to moderate somewhat from this year’s hot pace.

image

Currently, the U.S. economy is forming just over 400,000 new households per year as of the third quarter of 2013, significantly below the long-term average of just under 1.2 million. Given current population growth, America should be forming roughly 1 million new households each year.

However, the latest recession was so severe that it continues to suppress household formation. One piece of evidence: A growing percentage of young adults aged 18-34 are living with their parents. (…) We believe the “American Dream” of home ownership is intact and note the recent uptick in the home ownership rate as evidence of pent-up demand and an improving outlook for household formation given rising wealth and stronger job creation.

Kiesel just forgot to mention that rising wealth may not be reaching the 18-34 cohort just yet, while rising mortgage rates and restrictive credit scores are.

Philly Fed Weaker Than Expected

Just one day after the Fed announced a $10 billion taper to its monthly asset purchase program, the economic data has not been very good.  Of the five economic indicators released on Thursday, four came in weaker than expected.  One of those indicators was the Philly Fed report.  While economists were expecting the headline reading to come in at a level of 10, the actual reading was 7.0, which represented a slight increase from November’s reading of 6.5.

As shown, four of the nine components declined this month, led lower by Delivery Time and Prices Paid. The decline in Prices Paid should be a good sign for the Fed as it implies that inflation pressures remain contained.  On the upside, we saw the greatest improvement in Average Workweek and Shipments.  All in all, this morning’s report was pretty much neutral, but with a string of weaker than expected economic data just one day after the ‘taper’ was announced, one wonders if anyone at the Fed is beginning to have second thoughts.

High five Slight oversight by Bespoke: New Orders remain strong.

Jobless Claims Highest Since March

Jobless claims came in significantly higher than expected for the second straight week today (379K vs. 334K).  This week’s reading exceeded the spike we saw during the government shutdown and was the highest reading since March.  While the BLS blamed normal seasonal volatility, if the seasonality was so ‘normal’ why was it unexpected?  While last week’s rise was written off as a one off, two weeks is a little more notable.

After the increases of the last two weeks, the four-week moving average rose to 343.5K.  If the elevated levels of the last two weeks continue, it will start showing up more in this figure and that would be troubling especially given the Fed’s timing of the taper yesterday.

Conference Board Leading Economic Index: Fifth Month of Growth
 

The Conference Board LEI for the U.S. increased for the fifth consecutive month in November. Positive contributions from the yield spread, initial claims for unemployment insurance (inverted), and ISM® new orders more than offset negative contributions from consumer expectations for business conditions and building permits. In the six-month period ending November 2013, the leading economic index increased 3.1 percent (about a 6.4 percent annual rate), faster than the growth of 2.0 percent (about a 4.1 percent annual rate) during the previous six months. In addition, the strengths among the leading indicators have become more widespread.

Click to View
 

No recession in sight. Thumbs up

China cash injection fails to calm lenders
Stocks slide as money market rates stay dangerously high

An emergency cash injection by the Chinese central bank failed to calm the country’s lenders as money market rates climbed to dangerously high levels.

Analysts cited a variety of technical factors for the tightness in the Chinese financial system, but the sudden run-up in rates was an uncomfortable echo of a cash crunch that rattled global markets earlier this year.

Concerns focused on the rates at which Chinese banks lend to each other. The seven-day bond repurchase rate, a key gauge of short-term liquidity, was emblematic of their reluctance to part with cash. It averaged 7.6 per cent in morning trading on Friday, its highest since the crunch that hit China in late June. That was up 100 basis points from Thursday and far above the 4.3 per cent level at which it traded just a week ago.

The sharp increase occurred despite the central bank’s highly unusual decision to conduct a “short-term liquidity operation” on Thursday, providing a shot of credit to lenders struggling for cash. In a clear sign of its concern at the stress in financial markets, the People’s Bank of China used its account on Weibo, China’s version of Twitter, to announce the SLO. According to the central bank’s own rules, it is only supposed to confirm SLOs one month after completing them.

The China Business News, a state-owned financial newspaper, reported that the short-term injection was worth Rmb200bn ($33bn), a large amount. But traders blamed the central bank for letting market conditions deteriorate to the point of needing an emergency injection in the first place. The PBoC steadfastly refused to add liquidity to the market in recent weeks despite the banking system’s regular year-end scramble for cash.

Pointing up Lu Ting, an economist with Bank of America Merrill Lynch, said China’s financial system was entering a new era and policy makers were struggling to adapt. “The PBoC is faced with some serious challenges . . . and is confused,” he said. “The PBoC finds it much more likely than before to make [operational] mistakes.”

Mr Lu said he was confident that China would avoid a full-fledged repeat of June’s cash crunch because the central bank did not want to see an over-tightening of monetary conditions. Rather, he and other analysts said the PBoC appeared to have misjudged the flow of funds in the economy. (…)

 

One thought on “NEW$ & VIEW$ (20 DECEMBER 2013)

  1. As always, you have interesting charts and comments.
    Looking today at the household formation chart, it looks to me like there are 4 levels.The first lasted from ’56-’66. The second was during the ’70’s and maybe thru the mid ’80’s.The third lasted thru to the early oughts. The last period is the one we are currently experiencing. I wonder if the last period is the “new normal”. IE household formations will remain between 500- !000k until the next cycle. My loose understanding of demographics suggest these trends are supportable. Moreover, as you point out trickle down economics still has no foundation in fact.

    The one issue is that I believe there are 2 data series that collect household formation figures. One suggested that house hold formations were picking up about 6 months ago. This series suggests otherwise.

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