Federal Reserve Chairman Ben S. Bernanke will probably forgo announcing a third round of large- scale asset purchases this week, and is more likely to wait until September to unveil plans to buy $600 billion in housing and government debt, according to median estimates of economists in a Bloomberg News survey.
Eighty-eight percent of economists say the Federal Open Market Committee will refrain from starting new purchases at a two-day meeting beginning today in Washington. Forty-eight percent say the FOMC will announce the buying at its Sept. 12-13 meeting, according to the July 25-27 survey of 58 economists.
The FOMC may take further action should the job market not make “sustained progress” in bringing down an unemployment rate stuck above 8 percent for 41 consecutive months, Bernanke said this month in congressional testimony. The FOMC wants to see more jobs data before beginning asset purchases aimed at holding down borrowing costs, spurring growth and reducing unemployment, said Michael Gapen, senior U.S. economist for Barclays Plc in New York.
Policy makers “don’t need to do something immediately because the economy is basically treading water,” with a second quarter growth rate of 1.5 percent, Gapen said. “What gives the Fed the ability to sit tight for now is financial market conditions haven’t weakened that much.”
Rather than increase asset purchases this week, the Fed is more likely to extend its pledge to hold its main interest rate near zero beyond its current horizon of late 2014. Twenty-six percent of economists expect the central bank to announce a later date, while 74 percent of economists expect the Fed not to change its forward guidance, according to the survey.
Trigger Finger
“There’s nothing that really suggests the Fed has an itchy trigger finger or that they’re champing at the bit to ease policy again,” said Paul Edelstein, director of financial economics for IHS Global Insight in Lexington, Massachusetts.
By waiting to step up stimulus until September, when Bernanke is scheduled to hold a press conference and policy makers will update forecasts for growth and unemployment, the FOMC can “give some guidance to markets and link it directly to their outlook for the economy,” he said.
The Labor Department plans on Aug. 3 to release its payrolls report for July. The report is likely to show that employers added 100,000 jobs this month, according to the median forecast in a separate survey of economists, compared with the 80,000 increase in June.
Asked to estimate the size and composition of new asset purchases, 34 of 48 economists said a new round of quantitative easing will consist of mortgage-backed securities and Treasury securities. Thirteen of the 48 economists said the purchases would consist entirely of mortgage-backed securities.
Second Round
The median estimate was for purchases totaling $600 billion, the same size as the second round of asset purchases announced in November 2010. Economists predict the purchases will be split evenly between Treasuries and mortgage debt.
“In general their preference is to use Treasuries rather than mortgages, but at this point they’re owning more and more of the Treasury market, so there’s reason to spread it out,” said Jim O’Sullivan, chief U.S. economist for High Frequency Economics in Valhalla, New York.
Global stocks rallied last week despite as European Central Bank President Mario Draghi said July 26 he is prepared to do “whatever it takes to preserve the euro.”
Since Draghi’s remarks, the MSCI World Index rose 4.3 percent and the S&P 500 has increased 3.5 percent. The S&P 500 was little changed yesterday, closing at 1,385.30. The index is up 10.2 percent this year.
Fiscal Cliff
Fed officials have identified Europe as one of “two main sources of risk,” Bernanke said in his testimony to Congress this month. The other risk is the so-called fiscal cliff, about $600 billion of spending cuts and tax increases that are scheduled to go into effect at the end of the year unless Congress acts.
Bernanke cited a Congressional Budget Office estimate that the full range of spending cuts and tax increases would knock the U.S. into a “shallow recession” in 2013.
“We are seeing demand being relatively stable,” Jim Compton, chief revenue officer of United Continental Holdings Inc., said in a July 26 earnings call. His company is the world’s largest carrier.
“When we talk about the economy being tepid, we are very much aware of, particularly Europe, and are keeping our eyes on that,” he said. “We’re obviously watching softness in the economy to see where that turns.”
While lawmakers may not resolve U.S. fiscal challenges until after the Nov. 6 election, economists don’t believe the Fed will alter its stimulus based on the political calendar, according to the survey.
Before Election
Sixty-five percent of the economists surveyed believe the Fed won’t be influenced by politics as it weighs whether to start a new round of bond purchases. Eighteen percent say the Fed will be more likely to act before the election, while the same proportion percent say the Fed would be more likely to wait until after Nov. 6.
Bernanke testified on July 17 that the prospect for more stimulus hinges on job creation and the outlook for inflation.
“It’s very important that we see sustained progress in the labor market and avoid deflation risk,” he said. “Those are the things we’ll be looking at as the committee meets later this month and later this summer.”
Inflation, excluding food and energy, was 1.8 percent in the year through May, according to the Commerce Department’s personal consumption expenditures index. Including all items, prices rose 1.5 percent during the period.
Inflation Target
While inflation is below the Fed’s 2 percent target, market expectations for price gains have increased since the Fed began a second round of asset purchases and started so-called Operation Twist, a program to extend the average duration of securities in the Fed’s portfolio.
Traders in inflation protected securities predict inflation of 2.1 percent over the next 10 years. That compares with 1.5 percent in August 2010, when Bernanke signaled the Fed may initiate a second round of quantitative easing, and 1.7 percent in September of 2011, when the Fed started Operation Twist.
The Fed chairman said the central bank’s tools for easing policy include further purchases of Treasuries and mortgage- backed securities, altering the Fed’s language on the outlook for interest rates and reducing the rate the Fed pays banks on excess reserves.
Economists believe the Fed is unlikely to lower the interest rate on excess reserves. Four percent expect such a move this week, while 14 percent see the Fed doing so in September. Seventy-four percent of economists say the Fed won’t use the policy tool.
To contact the reporter on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net
Tuesday, July 31, 2012
Saturday, July 28, 2012
Thursday, July 26, 2012
Pending Sales of U.S. Homes Unexpectedly Fell 1.4% in June
Contracts to purchase previously owned homes unexpectedly dropped in June for the second time in the last three months, a sign of limited momentum in housing.
The index of pending home resales decreased 1.4 percent to 99.3 after a revised 5.4 percent gain in May that was less than initially reported, figures from the National Association of Realtors showed today in Washington. The median forecast of economists surveyed by Bloomberg News called for a 0.3 percent June increase.
Slower job growth that’s holding down confidence and strict lending standards are restraining housing even with cheaper properties and mortgage rates at all-time lows. While acknowledging the improvement in housing, Federal Reserve Chairman Ben S. Bernanke said last week that policy makers are ready to take further action to boost an economy that faces a headwind from Europe’s debt crisis.
“One of the cruel facts of this current backdrop is that few people have really been able to take advantage of these historically low rates -- whether that’s by choice or force,” Tom Porcelli, chief U.S. economist for RBC Capital Markets LLC in New York, said before the report. “You really haven’t seen purchase applications pick up in any meaningful way at this stage.”
Estimates in the Bloomberg survey of 34 economists ranged from a drop of 4 percent to a gain of 4 percent.
Another report today showed orders for durable goods climbed more than forecast in June, boosted by demand for military hardware and aircraft. Bookings increased 1.6 percent for a second month, the Commerce Department said.
Orders excluding the volatile transportation category slumped 1.1 percent, the most in five months.
Jobless Claims
First-time applications for unemployment benefits fell more than forecast last week, extending the period of volatility typically seen in July. Jobless claims dropped 35,000 in the period ended July 21 to 353,000, the Labor Department said.
Pending home sales provide insight into actual contract closings a month or two later. Purchases of existing homes, which made up about 93 percent of the residential real estate market last year, are tabulated when the contract closes.
Today’s figures suggest sales of existing homes will slow. Purchases decreased 5.4 percent to an eight-month low 4.37 million annual rate, the Realtors group said July 19.
Existing-home sales have climbed since reaching a low of 3.39 million at an annual rate in July 2010. In the buildup to the subprime lending collapse and recession, sales reached a peak of 7.25 million in September 2005.
Distressed Properties
Competition from cheaper distressed properties may have held down existing-home sales. Transactions involving foreclosures and short sales, where a lender agrees to accept less than the balance of the mortgage, accounted for 25 percent of the total last month, matching the May figure.
“We’ve been seeing a steady decline in the level of housing inventory, which is most pronounced in the lower price ranges popular with first-time buyers and investors,” Lawrence Yun, the Realtors group’s chief economist, said in a statement. “Any bank-owned properties that have been held back in markets with inventory shortages should be released expeditiously to help meet market demand.”
New dwellings accounted for almost 7 percent of the market last year, down from a high of 15 percent during the boom of the past decade. Sales of new homes dropped 8.4 percent to a 350,000 annual rate in June, a Commerce Department report showed July 25.
Year Ago
Compared with a year earlier, June pending sales of previously owned properties increased 8.4 percent after a 14.7 percent jump in May.
Contract signings decreased in three of the four regions, today’s report showed, including a 7.6 percent slump in the Northeast and a 2 percent decline in the South.
Low borrowing costs are making homes more affordable. The average rate on a 30-year fixed mortgage dropped last week to 3.53 percent, the lowest since Freddie Mac record-keeping began in 1972.
For companies like Sherwin-Williams Co. (SHW), gains in housing translate to more purchases.
“Housing sales are picking back up and housing volumes are improving, those are all really positive market metrics to sustain growth in this business,” Christopher Connor, chairman and chief executive officer of the Cleveland-based paint manufacturer, said on a July 19 earnings call.
To contact the reporter on this story: Michelle Jamrisko in Washington at mjamrisko@bloomberg.net
The index of pending home resales decreased 1.4 percent to 99.3 after a revised 5.4 percent gain in May that was less than initially reported, figures from the National Association of Realtors showed today in Washington. The median forecast of economists surveyed by Bloomberg News called for a 0.3 percent June increase.
Slower job growth that’s holding down confidence and strict lending standards are restraining housing even with cheaper properties and mortgage rates at all-time lows. While acknowledging the improvement in housing, Federal Reserve Chairman Ben S. Bernanke said last week that policy makers are ready to take further action to boost an economy that faces a headwind from Europe’s debt crisis.
“One of the cruel facts of this current backdrop is that few people have really been able to take advantage of these historically low rates -- whether that’s by choice or force,” Tom Porcelli, chief U.S. economist for RBC Capital Markets LLC in New York, said before the report. “You really haven’t seen purchase applications pick up in any meaningful way at this stage.”
Estimates in the Bloomberg survey of 34 economists ranged from a drop of 4 percent to a gain of 4 percent.
Another report today showed orders for durable goods climbed more than forecast in June, boosted by demand for military hardware and aircraft. Bookings increased 1.6 percent for a second month, the Commerce Department said.
Orders excluding the volatile transportation category slumped 1.1 percent, the most in five months.
Jobless Claims
First-time applications for unemployment benefits fell more than forecast last week, extending the period of volatility typically seen in July. Jobless claims dropped 35,000 in the period ended July 21 to 353,000, the Labor Department said.
Pending home sales provide insight into actual contract closings a month or two later. Purchases of existing homes, which made up about 93 percent of the residential real estate market last year, are tabulated when the contract closes.
Today’s figures suggest sales of existing homes will slow. Purchases decreased 5.4 percent to an eight-month low 4.37 million annual rate, the Realtors group said July 19.
Existing-home sales have climbed since reaching a low of 3.39 million at an annual rate in July 2010. In the buildup to the subprime lending collapse and recession, sales reached a peak of 7.25 million in September 2005.
Distressed Properties
Competition from cheaper distressed properties may have held down existing-home sales. Transactions involving foreclosures and short sales, where a lender agrees to accept less than the balance of the mortgage, accounted for 25 percent of the total last month, matching the May figure.
“We’ve been seeing a steady decline in the level of housing inventory, which is most pronounced in the lower price ranges popular with first-time buyers and investors,” Lawrence Yun, the Realtors group’s chief economist, said in a statement. “Any bank-owned properties that have been held back in markets with inventory shortages should be released expeditiously to help meet market demand.”
New dwellings accounted for almost 7 percent of the market last year, down from a high of 15 percent during the boom of the past decade. Sales of new homes dropped 8.4 percent to a 350,000 annual rate in June, a Commerce Department report showed July 25.
Year Ago
Compared with a year earlier, June pending sales of previously owned properties increased 8.4 percent after a 14.7 percent jump in May.
Contract signings decreased in three of the four regions, today’s report showed, including a 7.6 percent slump in the Northeast and a 2 percent decline in the South.
Low borrowing costs are making homes more affordable. The average rate on a 30-year fixed mortgage dropped last week to 3.53 percent, the lowest since Freddie Mac record-keeping began in 1972.
For companies like Sherwin-Williams Co. (SHW), gains in housing translate to more purchases.
“Housing sales are picking back up and housing volumes are improving, those are all really positive market metrics to sustain growth in this business,” Christopher Connor, chairman and chief executive officer of the Cleveland-based paint manufacturer, said on a July 19 earnings call.
To contact the reporter on this story: Michelle Jamrisko in Washington at mjamrisko@bloomberg.net
Wednesday, July 25, 2012
Marine vs. 30 Cops
Sgt. Shamar Thomas USMC Veteran: "I took an Oath that I live by. I am NOT anti-NYPD. I am anti- Police Brutality. I am no longer under contract with the USMC so I do NOT have to follow military uniform regulations. I DON'T affiliate myself with ANY POLITICAL ORG. I affiliate myself with the AMERICAN PEOPLE that's it. I REFUSE to affiliate with anything that SEPARATES. There is an obvious problem in the country and PEACEFUL PEOPLE should be allowed to PROTEST without Brutality. I was involved in a RIOT in Rutbah, Iraq 2004 and we did NOT treat the Iraqi citizens like they are treating the unarmed civilians in our OWN Country. No one was brutalized because our mission was to "WIN the hearts and minds", why should I expect anything less in my OWN Country. I DO NOT SUPPORT WAR. If you don't like this video or my beard. Then SUPPORT A WOUNDED WARRIOR!...And a desert marpat blouse is not a uniform"
_______________________________________________________________________
United States Marine Corps. Sgt. Shamar Thomas from Roosevelt, NY went toe to toe with the New York Police Department. An activist in the Occupy Wall Street movement, Thomas voiced his opinions of the NYPD police brutality that had and has been plaguing the #OWS movement.
Thomas comes from a long line of people who sacrifice for their country: Mother, Army Veteran (Iraq), Step father, Army, active duty (Afghanistan), Grand father, Air Force veteran (Vietnam), Great Grand Father Navy veteran (World War II).
To contact Sgt. Thomas directly: sgtshamarthomasusmc@yahoo.com
Wednesday, July 18, 2012
Bernanke Testimony To Prop Up USD, Euro Optimism To Be Short-Lived
Talking Points
U.S. Dollar: Consumer Prices To Slow Further, All Eyes On Bernanke Testimony
Euro: Spain Bond Auction Exceeds Target, Bailout Talks To Start On July 20
British Pound: U.K. Inflation Slows, BoE Minutes In Focus
U.S. Dollar: Consumer Prices To Slow Further, All Eyes On Bernanke Testimony
The greenback is firming up ahead of the North American trade, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) paring the overnight decline to 10,093, and the Fed’s semi-annual report should dictate price action for the remainder of the week as market participants weigh the prospects for future policy. Indeed, there’s speculation that Chairman Ben Bernanke may hint at additional monetary easing amid the slowing recovery, but we may the central bank head endorse a wait-and-see approach as the FOMC expands ‘Operation Twist.’
Although we expected Mr. Bernanke to keep all options on the table, there’s certainly limited scope for the Fed to push through another large-scale asset purchase program as the central bank sees the economy on a more sustainable path. However, as consumer prices in the U.S. are expected to expand at the slowest pace since January 2011, easing price pressures may continue to fuel bets for more monetary stimulus, but we will be keeping a close eye on the core CPI as it continues to hold above the 2% target for inflation. As the USDOLLAR carves out a higher low in July, we should see the upward trend continue to take shape, and we are still looking for another run at the 10,300 figure as the Federal Reserve gradually moves away from its easing cycle.
Euro: Spain Bond Auction Exceeds Target, Bailout Talks To Start On July 20
The Euro climbed to a fresh weekly high of 1.2316 as Spain sold EUR 3.56B in bills, which exceeded the EUR 3.5B target, with the debt yielding 3.918%, which compares to the 5.074% offered in June. As European finance ministers are scheduled to discuss Spain’s bailout package on July 20, the renewed efforts to tackle the debt crisis may continue to prop up the single currency, but the policy outlook continues to generate a bearish outlook for the EURUSD as the European Central Bank continues to embark on its easing cycle. As the fundamental outlook for the euro-area continues to deteriorate, the heightening risk for a prolonged recession may encourage the ECB to adopt a zero interest rate policy (ZIRP), but the Governing Council may have little choice but to implement a range of tools to address the risks surrounding the region as European policy makers struggle to stem the risk for contagion. As the relative strength index on the EURUSD continues to come off of oversold territory, the short-term rebound may produce a run at the 20-Day SMA (1.2426), but we continue to favor the downside as price action remains capped by the 50-Day SMA (1.2540).
British Pound: U.K. Inflation Slows, BoE Minutes In Focus
The British Pound failed to maintain the overnight advance to 1.5677 as the headline reading for U.K. inflation expanded at the slowest pace since November 2009, and the Bank of England Minutes on tap for tomorrow may produce additional downside pressures on the sterling should the central bank talk up speculation for more quantitative easing. Indeed, we’re very interested to see the vote count as the Monetary Policy Committee expanded the Asset Purchase Facility to GBP 375B earlier this month, but the central bank’s fundamental assessment should have the greatest impact on future price action as Governor Mervyn King aims to encourage a stronger recovery. As the BoE & U.K. Treasury take additional steps to shore up private sector credit, the new initiative should alleviate calls for more QE, and we may see the committee revert back to a wait-and-see approach as policy makers anticipate to see a stronger recovery in the second-half of the year. As the GBPUSD struggles to push back above the 61.8% Fibonacci retracement from the 2009 low to high around 1.5690-1.5700, we should see the GBPUSD maintain the broad range carried over from June, but the pair may weaken to the 50.0% Fib around 1.5270 should we see an overwhelming majority of the MPC support more easing.
--- Written by David Song, Currency Analyst
To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong
U.S. Dollar: Consumer Prices To Slow Further, All Eyes On Bernanke Testimony
Euro: Spain Bond Auction Exceeds Target, Bailout Talks To Start On July 20
British Pound: U.K. Inflation Slows, BoE Minutes In Focus
U.S. Dollar: Consumer Prices To Slow Further, All Eyes On Bernanke Testimony
The greenback is firming up ahead of the North American trade, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) paring the overnight decline to 10,093, and the Fed’s semi-annual report should dictate price action for the remainder of the week as market participants weigh the prospects for future policy. Indeed, there’s speculation that Chairman Ben Bernanke may hint at additional monetary easing amid the slowing recovery, but we may the central bank head endorse a wait-and-see approach as the FOMC expands ‘Operation Twist.’
Although we expected Mr. Bernanke to keep all options on the table, there’s certainly limited scope for the Fed to push through another large-scale asset purchase program as the central bank sees the economy on a more sustainable path. However, as consumer prices in the U.S. are expected to expand at the slowest pace since January 2011, easing price pressures may continue to fuel bets for more monetary stimulus, but we will be keeping a close eye on the core CPI as it continues to hold above the 2% target for inflation. As the USDOLLAR carves out a higher low in July, we should see the upward trend continue to take shape, and we are still looking for another run at the 10,300 figure as the Federal Reserve gradually moves away from its easing cycle.
Euro: Spain Bond Auction Exceeds Target, Bailout Talks To Start On July 20
The Euro climbed to a fresh weekly high of 1.2316 as Spain sold EUR 3.56B in bills, which exceeded the EUR 3.5B target, with the debt yielding 3.918%, which compares to the 5.074% offered in June. As European finance ministers are scheduled to discuss Spain’s bailout package on July 20, the renewed efforts to tackle the debt crisis may continue to prop up the single currency, but the policy outlook continues to generate a bearish outlook for the EURUSD as the European Central Bank continues to embark on its easing cycle. As the fundamental outlook for the euro-area continues to deteriorate, the heightening risk for a prolonged recession may encourage the ECB to adopt a zero interest rate policy (ZIRP), but the Governing Council may have little choice but to implement a range of tools to address the risks surrounding the region as European policy makers struggle to stem the risk for contagion. As the relative strength index on the EURUSD continues to come off of oversold territory, the short-term rebound may produce a run at the 20-Day SMA (1.2426), but we continue to favor the downside as price action remains capped by the 50-Day SMA (1.2540).
British Pound: U.K. Inflation Slows, BoE Minutes In Focus
The British Pound failed to maintain the overnight advance to 1.5677 as the headline reading for U.K. inflation expanded at the slowest pace since November 2009, and the Bank of England Minutes on tap for tomorrow may produce additional downside pressures on the sterling should the central bank talk up speculation for more quantitative easing. Indeed, we’re very interested to see the vote count as the Monetary Policy Committee expanded the Asset Purchase Facility to GBP 375B earlier this month, but the central bank’s fundamental assessment should have the greatest impact on future price action as Governor Mervyn King aims to encourage a stronger recovery. As the BoE & U.K. Treasury take additional steps to shore up private sector credit, the new initiative should alleviate calls for more QE, and we may see the committee revert back to a wait-and-see approach as policy makers anticipate to see a stronger recovery in the second-half of the year. As the GBPUSD struggles to push back above the 61.8% Fibonacci retracement from the 2009 low to high around 1.5690-1.5700, we should see the GBPUSD maintain the broad range carried over from June, but the pair may weaken to the 50.0% Fib around 1.5270 should we see an overwhelming majority of the MPC support more easing.
--- Written by David Song, Currency Analyst
To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong
Dollar Selloff Hits Day Three as Stocks Rebound, Volatility Low
Dollar Selloff Hits Day Three as Stocks Rebound, Volatility Low
If we boiled the greenback down to its most basic fundamental elements, there would be little to no surprise in its ongoing retracement. Keeping score, the Dow Jones FXCM Dollar Index (ticker = USDollar) closed this past session in the red and notched its slide to three consecutive sessions. We haven’t seen a tumble this consistent since a similar string of losses through June 4. For the last four-day bear run, we need to look all the way back to April 27 – a move that notably preceded a particularly aggressive 5 percent rally in only a month’s time. It is important to put this unfavorable performance into context however. Though the currency is carving out a relatively consistent decline that is obvious with pairs like EURUSD and AUDUSD, the conviction of the drive is hardly convincing. Momentum has not yet taken and the greenback has so far only retraced ground on broader ranges. That isn’t to suggest that the bear phase can’t find follow through. Rather, to make a true run lower, we need a catalyst and more importantly a fundamental theme to keep the pressure consistent.
The dollar’s role in the global scheme is the liquidity provider – bid when there is an extreme level of risk aversion or when there is no competitive level of yield from major alternatives. Looking at our standard measures for speculative interests, we find that the S&P 500 and Dow Jones Industrial Average both closed higher on the day and are closing in on the multi-month, swing high set near the beginning of the month. Given the advance in the standard ‘risk’ benchmarks, measures of volatility were naturally lower as well. The VIX closed at its lowest level since the end of April (16.5 percent) while the FX equivalent tested similar lows (at 9.1 percent). Rather than assessing the capital markets to be in a true bull trend, it is more appropriate to label this a correction occurring within a lull. A selloff like EURUSD is naturally prone to slow retracements as are other markets that are seeing their risk premium drop (measured through derivatives).
A true bull leg would need to see more than just a drop in expected volatility (risk) however. The measures of fear are already exceptionally low. We would need a climb in expectations for returns. Since growth forecasts won’t be picking up anytime soon and yields are clearly on the same track, the responsibility falls to temporary drivers – in other words, stimulus. On that track, stimulus hopefuls held their breath at Fed Chairman Bernanke’s policy testimony to the Senate. He repeated the group’s readiness to act if needed, listed a few general areas of support they could pursue and voiced concern over the risks from the EU as well as the pace of labor recovery. Nothing here set a time frame or direct steps for new rounds of stimulus. Some were apparently hoping for more, as the dollar rallied; but the unchanged bearing pulled the dollar back.
Euro Follow Risk Lines as Bond Auctions and Investor Confidence Pass
The fundamental headlines for the euro were particularly heavy Tuesday, but the currency itself proved disinterested with a mixed performance against its largest counterparts. Notably, the shared currency slid against its unaffected, investment-favored counterparts and climbed against the safe haven alternatives. In other words, the euro followed the normal lines of risk trends. From the headlines, Greece and Spain both sold bonds (an opportunity to gauge the markets confidence). Greece saw little improvement in rates, but Spanish yields were over a percentage point lower, suggesting the recent austerity push is drawing confidence. In other news, Italy’s Economic Bulletin downgraded 2012 and 2013 growth while Euro-area consumer confidence (ZEW) dropped. Watch for Portugal’s bond sale and an EU report on EZ public finances today.
British Pound Traders Look for Volatility in BoE Minutes and Labor Data
Given the Bank of England’s recent increase to its stimulus program, there was limited interest paid to the June CPI figures from this past session. That said, the 2.4 percent year-over-year pace inflation represents the lowest reading since November 2009. The hawkish policy argument has evaporated quickly. Though this past session’s data was played down, perhaps the upcoming labour stats and minutes from the last policy decision can stir more volatility for the sterling. It wouldn’t take much. The currency looks primed for a breakout in narrow ranges.
Canadian Dollar Not Paid its Fundamental Dues after BoC Keeps Hawkish Lean
In a market where global rates are near a record low and financial risks linger in the background, the Canadian dollar stands well above its counterparts. After announcing that the benchmark rate would be kept at 1.00 percent, the Bank of Canada did something that stands in direct contrast to every one of its major counterparts: they maintained their hawkish (albeit restrained) bias. The loonie is at somewhat a disadvantage because its yield is lower than its Aussie and kiwi counterparts, but the safe haven appeal puts it in a very unique position. Just wait for ‘risk off’.
Australian Dollar Outperforms on Equities Swell, Shift in RBA Tone
Given the sharp swing in risk trends this past session, it should come as little surprise that the Aussie dollar was taking full advantage by advancing against every one of its liquid counterparts. The currency’s first drive higher happened around the same time as the RBA minutes. That said, the surge happened before the official release and was more likely the reaction to Asian equities strong advance on Tuesday’s open. Nevertheless, the shift back to neutral for monetary policy is a bullish contributor as well as it removes rate-cut potential positioning.
New Zealand Dollar: Rate Forecast Surprisingly Stable Despite CPI
With risk trends posting a deliberate trend, the kiwi dollar’s reaction to fundamental event risk was a little scheduled. The New Zealand currency’s position in the global FX market is secured by its place as an investment currency. That said, the risk posed by the weakest CPI reading since 1999 would normally be read as a selling point. That said, currency and rate forecast (12-month sees -17bps) were little affected.
Gold Within a Closing $50 Range as Implied Volatility Hits a Two-Month Low
Fed Chairman Bernanke’s refusal to feed speculators’ expectations for additional stimulus disarms a potentially potent fundamental catalyst for gold. That said, his reiteration of ‘readiness’ doesn’t write off the possibility. The metal showed some volatility on the day but didn’t make any serious progress. With a $50 range and implied (expected) volatility at a two-month low, the risk of a serious breakout is growing.
If we boiled the greenback down to its most basic fundamental elements, there would be little to no surprise in its ongoing retracement. Keeping score, the Dow Jones FXCM Dollar Index (ticker = USDollar) closed this past session in the red and notched its slide to three consecutive sessions. We haven’t seen a tumble this consistent since a similar string of losses through June 4. For the last four-day bear run, we need to look all the way back to April 27 – a move that notably preceded a particularly aggressive 5 percent rally in only a month’s time. It is important to put this unfavorable performance into context however. Though the currency is carving out a relatively consistent decline that is obvious with pairs like EURUSD and AUDUSD, the conviction of the drive is hardly convincing. Momentum has not yet taken and the greenback has so far only retraced ground on broader ranges. That isn’t to suggest that the bear phase can’t find follow through. Rather, to make a true run lower, we need a catalyst and more importantly a fundamental theme to keep the pressure consistent.
The dollar’s role in the global scheme is the liquidity provider – bid when there is an extreme level of risk aversion or when there is no competitive level of yield from major alternatives. Looking at our standard measures for speculative interests, we find that the S&P 500 and Dow Jones Industrial Average both closed higher on the day and are closing in on the multi-month, swing high set near the beginning of the month. Given the advance in the standard ‘risk’ benchmarks, measures of volatility were naturally lower as well. The VIX closed at its lowest level since the end of April (16.5 percent) while the FX equivalent tested similar lows (at 9.1 percent). Rather than assessing the capital markets to be in a true bull trend, it is more appropriate to label this a correction occurring within a lull. A selloff like EURUSD is naturally prone to slow retracements as are other markets that are seeing their risk premium drop (measured through derivatives).
A true bull leg would need to see more than just a drop in expected volatility (risk) however. The measures of fear are already exceptionally low. We would need a climb in expectations for returns. Since growth forecasts won’t be picking up anytime soon and yields are clearly on the same track, the responsibility falls to temporary drivers – in other words, stimulus. On that track, stimulus hopefuls held their breath at Fed Chairman Bernanke’s policy testimony to the Senate. He repeated the group’s readiness to act if needed, listed a few general areas of support they could pursue and voiced concern over the risks from the EU as well as the pace of labor recovery. Nothing here set a time frame or direct steps for new rounds of stimulus. Some were apparently hoping for more, as the dollar rallied; but the unchanged bearing pulled the dollar back.
Euro Follow Risk Lines as Bond Auctions and Investor Confidence Pass
The fundamental headlines for the euro were particularly heavy Tuesday, but the currency itself proved disinterested with a mixed performance against its largest counterparts. Notably, the shared currency slid against its unaffected, investment-favored counterparts and climbed against the safe haven alternatives. In other words, the euro followed the normal lines of risk trends. From the headlines, Greece and Spain both sold bonds (an opportunity to gauge the markets confidence). Greece saw little improvement in rates, but Spanish yields were over a percentage point lower, suggesting the recent austerity push is drawing confidence. In other news, Italy’s Economic Bulletin downgraded 2012 and 2013 growth while Euro-area consumer confidence (ZEW) dropped. Watch for Portugal’s bond sale and an EU report on EZ public finances today.
British Pound Traders Look for Volatility in BoE Minutes and Labor Data
Given the Bank of England’s recent increase to its stimulus program, there was limited interest paid to the June CPI figures from this past session. That said, the 2.4 percent year-over-year pace inflation represents the lowest reading since November 2009. The hawkish policy argument has evaporated quickly. Though this past session’s data was played down, perhaps the upcoming labour stats and minutes from the last policy decision can stir more volatility for the sterling. It wouldn’t take much. The currency looks primed for a breakout in narrow ranges.
Canadian Dollar Not Paid its Fundamental Dues after BoC Keeps Hawkish Lean
In a market where global rates are near a record low and financial risks linger in the background, the Canadian dollar stands well above its counterparts. After announcing that the benchmark rate would be kept at 1.00 percent, the Bank of Canada did something that stands in direct contrast to every one of its major counterparts: they maintained their hawkish (albeit restrained) bias. The loonie is at somewhat a disadvantage because its yield is lower than its Aussie and kiwi counterparts, but the safe haven appeal puts it in a very unique position. Just wait for ‘risk off’.
Australian Dollar Outperforms on Equities Swell, Shift in RBA Tone
Given the sharp swing in risk trends this past session, it should come as little surprise that the Aussie dollar was taking full advantage by advancing against every one of its liquid counterparts. The currency’s first drive higher happened around the same time as the RBA minutes. That said, the surge happened before the official release and was more likely the reaction to Asian equities strong advance on Tuesday’s open. Nevertheless, the shift back to neutral for monetary policy is a bullish contributor as well as it removes rate-cut potential positioning.
New Zealand Dollar: Rate Forecast Surprisingly Stable Despite CPI
With risk trends posting a deliberate trend, the kiwi dollar’s reaction to fundamental event risk was a little scheduled. The New Zealand currency’s position in the global FX market is secured by its place as an investment currency. That said, the risk posed by the weakest CPI reading since 1999 would normally be read as a selling point. That said, currency and rate forecast (12-month sees -17bps) were little affected.
Gold Within a Closing $50 Range as Implied Volatility Hits a Two-Month Low
Fed Chairman Bernanke’s refusal to feed speculators’ expectations for additional stimulus disarms a potentially potent fundamental catalyst for gold. That said, his reiteration of ‘readiness’ doesn’t write off the possibility. The metal showed some volatility on the day but didn’t make any serious progress. With a $50 range and implied (expected) volatility at a two-month low, the risk of a serious breakout is growing.
Monday, July 16, 2012
London House Prices Plunge as Supply Surge Adds to Summer Lull
By Fergal O’Brien - Jul 16, 2012 7:01 AM GMT+0800
London home sellers cut prices by a record for the month of July as an increase in supply added to pressure on the property market during the traditional summer lull, Rightmove Plc (RMV) said.
Asking prices dropped 3.6 percent from June to an average 460,304 pounds ($715,600), the operator of Britain’s biggest property website said in an e-mailed report today. Across England and Wales, values fell 1.7 percent to 242,097 pounds.
Property demand weakened in July as bad weather curbed viewings and the London Olympics added to “distractions,” according to Rightmove. As Britain’s housing market struggles to recover, the Bank of England last week announced details of its new lending program aimed at boosting credit to the economy.
The drop in London follows “several months of fairly heady price increases,” said Miles Shipside, commercial director of Rightmove. “It might just be that the market is finding a price level where buyers and sellers are willing to transact.”
In a separate report today, the Ernst & Young Item Club said that house prices will fall 2 percent this year, leaving them 8 percent below the 2008 peak in nominal terms, and down 24 percent in real terms. The group, which produces forecasts from a model similar to that of the U.K. Treasury, cut its forecast for gross domestic product and predicted no growth this year.
London Falling
In London, part of the price decline may have reflected a tax increase on properties costing at least 2 million pounds, announced by the government in March, Rightmove said. Values in Kensington and Chelsea, the capital’s most expensive district, fell 5.1 percent in July to 2.03 million pounds.
The number of new sellers rose 6 percent in July from June, Rightmove said. The biggest decline in asking prices was recorded in Brent, down 8.9 percent, followed by Kingston-upon- Thames, down 5.8 percent. Hackney and Greenwich were the only districts to record increases. Values in London were up 6.4 percent in July from a year earlier.
“This increase in seller numbers is unusual at this time of year when there is traditionally less buyer activity, and is made even more surprising given the proximity to Olympic distractions and upheaval,” Shipside said.
Nationally, growth in property supply outpaced demand by a ratio of 2:1 due to “miserable” viewing weather, Rightmove said. The Met Office said Britain suffered the wettest June for over a century “followed up by a very wet start to July.”
Of the 10 regions tracked by Rightmove, only one, the West Midlands, recorded a monthly increase in prices in July. Average house values rose 2.3 percent from a year earlier.
London home sellers cut prices by a record for the month of July as an increase in supply added to pressure on the property market during the traditional summer lull, Rightmove Plc (RMV) said.
As Britain’s housing market struggles to recover, the Bank of England last week announced details of its new lending program aimed at boosting credit to the economy. Photographer: Chris Ratcliffe/Bloomberg
Asking prices dropped 3.6 percent from June to an average 460,304 pounds ($715,600), the operator of Britain’s biggest property website said in an e-mailed report today. Across England and Wales, values fell 1.7 percent to 242,097 pounds.
Property demand weakened in July as bad weather curbed viewings and the London Olympics added to “distractions,” according to Rightmove. As Britain’s housing market struggles to recover, the Bank of England last week announced details of its new lending program aimed at boosting credit to the economy.
The drop in London follows “several months of fairly heady price increases,” said Miles Shipside, commercial director of Rightmove. “It might just be that the market is finding a price level where buyers and sellers are willing to transact.”
In a separate report today, the Ernst & Young Item Club said that house prices will fall 2 percent this year, leaving them 8 percent below the 2008 peak in nominal terms, and down 24 percent in real terms. The group, which produces forecasts from a model similar to that of the U.K. Treasury, cut its forecast for gross domestic product and predicted no growth this year.
London Falling
In London, part of the price decline may have reflected a tax increase on properties costing at least 2 million pounds, announced by the government in March, Rightmove said. Values in Kensington and Chelsea, the capital’s most expensive district, fell 5.1 percent in July to 2.03 million pounds.
The number of new sellers rose 6 percent in July from June, Rightmove said. The biggest decline in asking prices was recorded in Brent, down 8.9 percent, followed by Kingston-upon- Thames, down 5.8 percent. Hackney and Greenwich were the only districts to record increases. Values in London were up 6.4 percent in July from a year earlier.
“This increase in seller numbers is unusual at this time of year when there is traditionally less buyer activity, and is made even more surprising given the proximity to Olympic distractions and upheaval,” Shipside said.
Nationally, growth in property supply outpaced demand by a ratio of 2:1 due to “miserable” viewing weather, Rightmove said. The Met Office said Britain suffered the wettest June for over a century “followed up by a very wet start to July.”
Of the 10 regions tracked by Rightmove, only one, the West Midlands, recorded a monthly increase in prices in July. Average house values rose 2.3 percent from a year earlier.
Downgrade Anniversary Shows Investors Gained Buying U.S.
By Mike Dorning, John Detrixhe and Ian Katz - Jul 16, 2012 12:00 PM GMT+0800
When Standard & Poor’s downgraded the U.S. government’s credit rating in August, predictions of serious fallout soon followed.
Republican presidential candidate Mitt Romney described it as a “meltdown” reminiscent of the economic crises of Jimmy Carter’s presidency. He warned of higher long-term interest rates and damage to foreign investors’ confidence in the U.S.
U.S. House Budget Committee Chairman Paul Ryan said the government’s loss of its AAA rating would raise the cost of mortgages and car loans. Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said over time the standing of the dollar and U.S. financial markets would erode and credit costs rise “for virtually all American borrowers.”
They were wrong. Almost a year later, mortgage rates have dropped to record lows, the government’s borrowing costs have eased, the dollar and the benchmark S&P stock index are up, and global investors’ enthusiasm for Treasury debt has strengthened.
“The U.S. Treasury is still the widest, deepest and most actively traded in the world,” said Jeffrey Caughron, a partner at Baker Group LP in Oklahoma City, which advises community banks on investments of more than $40 billion. “That becomes all the more important when you have signs of weakening global economic growth and continued problems in Europe.”
Even in a slow recovery, the U.S. has unparalleled assets in the global market, including the size and resilience of its economy and the dollar’s standing as the world’s reserve currency. Low Treasury yields show that most investors believe the U.S. government will meet its obligations, no matter how dysfunctional the political climate becomes in Washington.
Buffett’s Rating
Warren Buffett, the Omaha, Nebraska-based billionaire investor, turned out to be prescient in shrugging off the downgrade: “In Omaha, the U.S. is still triple-A,” Buffett said in 2011 amid the uproar. “In fact, if there were a quadruple-A rating, I’d give the U.S. that.”
Still, there is broad agreement that the U.S. must address the long-term fiscal imbalances that have driven public debt up to 68 percent of gross domestic product. Ryan and other pessimists contend the country is benefiting from temporary forces such as a flight of capital from Europe’s sovereign debt crisis and the Federal Reserve’s “Operation Twist” program to buy long-term debt.
They warn that the window financial markets have provided could close at some unpredictable time if the budget issues aren’t resolved. Standing in the way of a resolution is a widening partisan divide in Washington.
Debt-Limit Fight
Standard & Poor’s lowered the U.S. credit rating after months of wrangling last year between President Barack Obama and congressional Republicans over whether to raise the federal debt limit. Though the impasse ended with Obama signing a debt- ceiling increase on Aug. 2, S&P downgraded the U.S three days later, citing political gridlock in Washington and the nation’s long-term fiscal challenges.
Treasuries responded by staging the biggest rally since December 2008, returning 2.8 percent that month as investors repudiated the decision.
Yields on Treasuries due in 10 years have fallen 1.07 percentage point since the downgrade and have touched all-time lows, dropping to 1.44 percent on June 1. U.S. government bond prices, which move in inverse proportion to yields, have soared, such that the securities have gained 7 percent since Aug. 5 after returning 9.8 percent in 2011, their best performance since 2008, Bank of America Merrill Lynch index data show.
Big Returns
As a result, the naysayers would have earned about $8.59 million on a $100 million investment in Treasuries maturing in five to 10 years had they started a trade the day the U.S. was downgraded, according to the Merrill Lynch index data. Hedge funds worldwide have lost about 5.8 percent during that span, which would amount to a $5.8 million loss on a $100 million investment through the end of June, according to the Bloomberg Global Aggregate Hedge fund index.
The rally showed the downgrade “was a mistake,” Alan Blinder, a Princeton University professor and former Federal Reserve Board vice chairman, said in a July 2 interview in New York. “The U.S. Treasury is still at the top of the heap.”
Consumer borrowing costs have also dropped. Home loan rates for 30-year U.S. mortgages on July 12 fell to a record low for a fourth straight week. The average rate for a 30-year fixed mortgage declined to 3.56 percent in the week ended July 12, the lowest in Freddie Mac records dating to 1971. In the week ended Aug. 4, 2011, immediately before the downgrade, the average rate was 4.39 percent.
Dollar Index Rises
IntercontinentalExchange Inc.’s Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, has climbed about 12 percent since S&P’s Aug. 5 downgrade, as of July 13. The S&P 500 stock index has returned 15.6 percent, including reinvested dividends.
The U.S. attraction for global investors has strengthened. In May, 46 percent of international investors chose the U.S. as the market with the most potential during the next year, up from 31 percent a year earlier, according to a Bloomberg poll.
Because the consequences that had been forecast for a downgrade haven’t occurred, lawmakers may become more entrenched in their positions in the next standoff over fiscal policy, approaching at the end of the year. The threat of a downgrade has lost some of its power, said Steve Bell, a former Republican staff director for the Senate Budget Committee.
“You cried wolf, and no wolf appeared,” said Bell, who’s now a senior director at the Bipartisan Policy Center in Washington. “It has persuaded a fair number of members of Congress that the effect of a downgrade is overstated and it will not lead to some serious economic or financial problem.”
Confidence Falls
Still, the possibility of another downgrade will weigh on policy makers, said William Daley, Obama’s former White House chief of staff. Even though Treasury yields fell, “consumer confidence dropped dramatically after the downgrade, and do we really want to test that again?” he said.
The Conference Board’s Consumer Confidence index plunged from 59.2 in July 2011 to 45.2 in August in the wake of the debt standoff and credit downgrade. The index didn’t recover to its July level until December.
Growth in consumer spending slowed from 0.8 percent in July of last year to 0.1 percent in August before rebounding to 0.7 percent in September.
Romney, speaking to reporters in Concord, New Hampshire, three days after the downgrade, said the ratings cut “has a consequence not only for our borrowing cost long-term, but also for the ability of America to have the confidence of people around the world as investors in America.”
Impact Obscured
Glenn Hubbard, a Romney economic adviser, said in a July 12 telephone interview that the Republican candidate “was and is absolutely right.” Flight of capital out of Europe, a slowing world economy and the Fed’s program of replacing holdings of short-term debt with longer-term securities have obscured the impact of the downgrade, he said.
Ryan, a Wisconsin Republican, also defended his warning, saying interest rates haven’t gone up only because so many other nations are in such bad shape.
“We are a safe haven for now” for investors because of Europe’s debt crisis, Ryan said in an interview. Rates will rise, he predicted. “We just don’t know when, and I don’t want to tempt fate.”
El-Erian of Newport Beach, California-based Pimco, which oversees the world’s biggest bond fund, didn’t respond to a request for comment.
Declining Interest
Terry Belton, global head of fixed-income and foreign- exchange research at JPMorgan Chase & Co. in New York, said on a July 26, 2011, conference call that a downgrade could boost Treasury yields by as much as 70 basis points in the intermediate term and increase the government’s borrowing costs by $100 billion a year. A basis point is 0.01 percentage point.
Instead, the U.S. is on track to pay less interest this year. U.S. Treasury securities paid $454 billion of interest last year, according to the Congressional Budget Office. That’s projected to decline to $442 billion this year and won’t climb above the 2011 cost level until 2015, according to CBO forecasts.
Weakening U.S. credit quality, such that the nation more resembles a AA rated borrower, is still likely to drive up 10- year yields by about 60 basis points over time, JPMorgan’s Belton said in a recent interview.
“Yield changes during the last year had nothing to do with the downgrade, but it had to do with everything else pushing yields lower,” Belton said. “On the top of that list you have a massive flight to quality out of Europe, and the U.S. is a safe haven.”
Liquid Market
Investors outside the U.S. owned $5.16 trillion of U.S. government debt as of April 30, compared with $4.7 trillion at the end of July 2011 before the credit-rating cut.
“The one thing the Treasury market has above any other government bond market is liquidity,” Stuart Thomson, a money manager in Glasgow at Ignis Asset Management, which oversees the equivalent of $109 billion, said in a June 22 interview. “That liquidity premium is not going to disappear no matter how many downgrades Moody’s or S&P give to it.”
Bidders offered $3.16 for each dollar of the $1.075 trillion of notes and bonds auctioned by the Treasury Department this year as of July 2, as yields reached all-time lows, above the previous high of $3.04 in all of 2011, according to data compiled by Bloomberg. The so-called bid-to-cover ratio was 2.26 from 1998 to 2001 when the nation ran budget surpluses.
Thanks to Europe
“The Europeans have been making us look great,” said Phillip Swagel, former assistant Treasury secretary for economic policy in the George W. Bush administration and now a professor at the University of Maryland in College Park. “It’s all relative. We don’t have the political will to solve our problems that aren’t far over the horizon, but the Europeans don’t have the political will to solve the problems at their doorstep.”
S&P said last month that political and fiscal risks could lead to a second downgrade of U.S. debt by 2014. While Moody’s and Fitch Ratings have kept their top grades on the U.S., both have a negative outlook.
Nobel laureate Paul Krugman said before the downgrade that an S&P cut would be “no big deal,” according to an April 18, 2011, New York Times blog post.
“They have no really solid grip on what it is that they’re talking about,” Krugman, an economics professor at Princeton University, said in a telephone interview on May 9 of this year. “What does it mean to give the U.S. a credit rating? It’s unlikely the U.S. will ever default, we might engage in some inflation. So what is it that they’re talking about?”
When Standard & Poor’s downgraded the U.S. government’s credit rating in August, predictions of serious fallout soon followed.
U.S. House Budget Committee Chairman Paul Ryan and other pessimists contend the country is benefiting from temporary forces such as a flight of capital from Europe’s sovereign debt crisis and the Federal Reserve’s “Operation Twist” program to buy long-term debt. Photographer: Brendan Smialowski/Bloomberg
Republican presidential candidate Mitt Romney described it as a “meltdown” reminiscent of the economic crises of Jimmy Carter’s presidency. He warned of higher long-term interest rates and damage to foreign investors’ confidence in the U.S.
U.S. House Budget Committee Chairman Paul Ryan said the government’s loss of its AAA rating would raise the cost of mortgages and car loans. Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said over time the standing of the dollar and U.S. financial markets would erode and credit costs rise “for virtually all American borrowers.”
They were wrong. Almost a year later, mortgage rates have dropped to record lows, the government’s borrowing costs have eased, the dollar and the benchmark S&P stock index are up, and global investors’ enthusiasm for Treasury debt has strengthened.
“The U.S. Treasury is still the widest, deepest and most actively traded in the world,” said Jeffrey Caughron, a partner at Baker Group LP in Oklahoma City, which advises community banks on investments of more than $40 billion. “That becomes all the more important when you have signs of weakening global economic growth and continued problems in Europe.”
Even in a slow recovery, the U.S. has unparalleled assets in the global market, including the size and resilience of its economy and the dollar’s standing as the world’s reserve currency. Low Treasury yields show that most investors believe the U.S. government will meet its obligations, no matter how dysfunctional the political climate becomes in Washington.
Buffett’s Rating
Warren Buffett, the Omaha, Nebraska-based billionaire investor, turned out to be prescient in shrugging off the downgrade: “In Omaha, the U.S. is still triple-A,” Buffett said in 2011 amid the uproar. “In fact, if there were a quadruple-A rating, I’d give the U.S. that.”
Still, there is broad agreement that the U.S. must address the long-term fiscal imbalances that have driven public debt up to 68 percent of gross domestic product. Ryan and other pessimists contend the country is benefiting from temporary forces such as a flight of capital from Europe’s sovereign debt crisis and the Federal Reserve’s “Operation Twist” program to buy long-term debt.
They warn that the window financial markets have provided could close at some unpredictable time if the budget issues aren’t resolved. Standing in the way of a resolution is a widening partisan divide in Washington.
Debt-Limit Fight
Standard & Poor’s lowered the U.S. credit rating after months of wrangling last year between President Barack Obama and congressional Republicans over whether to raise the federal debt limit. Though the impasse ended with Obama signing a debt- ceiling increase on Aug. 2, S&P downgraded the U.S three days later, citing political gridlock in Washington and the nation’s long-term fiscal challenges.
Treasuries responded by staging the biggest rally since December 2008, returning 2.8 percent that month as investors repudiated the decision.
Yields on Treasuries due in 10 years have fallen 1.07 percentage point since the downgrade and have touched all-time lows, dropping to 1.44 percent on June 1. U.S. government bond prices, which move in inverse proportion to yields, have soared, such that the securities have gained 7 percent since Aug. 5 after returning 9.8 percent in 2011, their best performance since 2008, Bank of America Merrill Lynch index data show.
Big Returns
As a result, the naysayers would have earned about $8.59 million on a $100 million investment in Treasuries maturing in five to 10 years had they started a trade the day the U.S. was downgraded, according to the Merrill Lynch index data. Hedge funds worldwide have lost about 5.8 percent during that span, which would amount to a $5.8 million loss on a $100 million investment through the end of June, according to the Bloomberg Global Aggregate Hedge fund index.
The rally showed the downgrade “was a mistake,” Alan Blinder, a Princeton University professor and former Federal Reserve Board vice chairman, said in a July 2 interview in New York. “The U.S. Treasury is still at the top of the heap.”
Consumer borrowing costs have also dropped. Home loan rates for 30-year U.S. mortgages on July 12 fell to a record low for a fourth straight week. The average rate for a 30-year fixed mortgage declined to 3.56 percent in the week ended July 12, the lowest in Freddie Mac records dating to 1971. In the week ended Aug. 4, 2011, immediately before the downgrade, the average rate was 4.39 percent.
Dollar Index Rises
IntercontinentalExchange Inc.’s Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, has climbed about 12 percent since S&P’s Aug. 5 downgrade, as of July 13. The S&P 500 stock index has returned 15.6 percent, including reinvested dividends.
The U.S. attraction for global investors has strengthened. In May, 46 percent of international investors chose the U.S. as the market with the most potential during the next year, up from 31 percent a year earlier, according to a Bloomberg poll.
Because the consequences that had been forecast for a downgrade haven’t occurred, lawmakers may become more entrenched in their positions in the next standoff over fiscal policy, approaching at the end of the year. The threat of a downgrade has lost some of its power, said Steve Bell, a former Republican staff director for the Senate Budget Committee.
“You cried wolf, and no wolf appeared,” said Bell, who’s now a senior director at the Bipartisan Policy Center in Washington. “It has persuaded a fair number of members of Congress that the effect of a downgrade is overstated and it will not lead to some serious economic or financial problem.”
Confidence Falls
Still, the possibility of another downgrade will weigh on policy makers, said William Daley, Obama’s former White House chief of staff. Even though Treasury yields fell, “consumer confidence dropped dramatically after the downgrade, and do we really want to test that again?” he said.
The Conference Board’s Consumer Confidence index plunged from 59.2 in July 2011 to 45.2 in August in the wake of the debt standoff and credit downgrade. The index didn’t recover to its July level until December.
Growth in consumer spending slowed from 0.8 percent in July of last year to 0.1 percent in August before rebounding to 0.7 percent in September.
Romney, speaking to reporters in Concord, New Hampshire, three days after the downgrade, said the ratings cut “has a consequence not only for our borrowing cost long-term, but also for the ability of America to have the confidence of people around the world as investors in America.”
Impact Obscured
Glenn Hubbard, a Romney economic adviser, said in a July 12 telephone interview that the Republican candidate “was and is absolutely right.” Flight of capital out of Europe, a slowing world economy and the Fed’s program of replacing holdings of short-term debt with longer-term securities have obscured the impact of the downgrade, he said.
Ryan, a Wisconsin Republican, also defended his warning, saying interest rates haven’t gone up only because so many other nations are in such bad shape.
“We are a safe haven for now” for investors because of Europe’s debt crisis, Ryan said in an interview. Rates will rise, he predicted. “We just don’t know when, and I don’t want to tempt fate.”
El-Erian of Newport Beach, California-based Pimco, which oversees the world’s biggest bond fund, didn’t respond to a request for comment.
Declining Interest
Terry Belton, global head of fixed-income and foreign- exchange research at JPMorgan Chase & Co. in New York, said on a July 26, 2011, conference call that a downgrade could boost Treasury yields by as much as 70 basis points in the intermediate term and increase the government’s borrowing costs by $100 billion a year. A basis point is 0.01 percentage point.
Instead, the U.S. is on track to pay less interest this year. U.S. Treasury securities paid $454 billion of interest last year, according to the Congressional Budget Office. That’s projected to decline to $442 billion this year and won’t climb above the 2011 cost level until 2015, according to CBO forecasts.
Weakening U.S. credit quality, such that the nation more resembles a AA rated borrower, is still likely to drive up 10- year yields by about 60 basis points over time, JPMorgan’s Belton said in a recent interview.
“Yield changes during the last year had nothing to do with the downgrade, but it had to do with everything else pushing yields lower,” Belton said. “On the top of that list you have a massive flight to quality out of Europe, and the U.S. is a safe haven.”
Liquid Market
Investors outside the U.S. owned $5.16 trillion of U.S. government debt as of April 30, compared with $4.7 trillion at the end of July 2011 before the credit-rating cut.
“The one thing the Treasury market has above any other government bond market is liquidity,” Stuart Thomson, a money manager in Glasgow at Ignis Asset Management, which oversees the equivalent of $109 billion, said in a June 22 interview. “That liquidity premium is not going to disappear no matter how many downgrades Moody’s or S&P give to it.”
Bidders offered $3.16 for each dollar of the $1.075 trillion of notes and bonds auctioned by the Treasury Department this year as of July 2, as yields reached all-time lows, above the previous high of $3.04 in all of 2011, according to data compiled by Bloomberg. The so-called bid-to-cover ratio was 2.26 from 1998 to 2001 when the nation ran budget surpluses.
Thanks to Europe
“The Europeans have been making us look great,” said Phillip Swagel, former assistant Treasury secretary for economic policy in the George W. Bush administration and now a professor at the University of Maryland in College Park. “It’s all relative. We don’t have the political will to solve our problems that aren’t far over the horizon, but the Europeans don’t have the political will to solve the problems at their doorstep.”
S&P said last month that political and fiscal risks could lead to a second downgrade of U.S. debt by 2014. While Moody’s and Fitch Ratings have kept their top grades on the U.S., both have a negative outlook.
Nobel laureate Paul Krugman said before the downgrade that an S&P cut would be “no big deal,” according to an April 18, 2011, New York Times blog post.
“They have no really solid grip on what it is that they’re talking about,” Krugman, an economics professor at Princeton University, said in a telephone interview on May 9 of this year. “What does it mean to give the U.S. a credit rating? It’s unlikely the U.S. will ever default, we might engage in some inflation. So what is it that they’re talking about?”
Friday, July 13, 2012
Sunday, July 8, 2012
Thursday, July 5, 2012
Gerra (Verzasca)
It consisted of Gerra Piano and Agarone, exclaves in the Magadino Plain, and the main part (Gerra Valle) of the municipality in the Verzasca valley.
 | This image has been resized. Click this bar to view the full image. The original image is sized 741x574. |
| This image has been resized. Click this bar to view the full image. The original image is sized 804x536. |
| This image has been resized. Click this bar to view the full image. The original image is sized 1024x768. |
Subscribe to:
Posts (Atom)