Recap 6-25-12

Main Items:

  • Chicago Fed National Activity index dropped to -0.45 vs -0.3 exp and +0.11 prev.
  • US New Home Sales improved to 369k in May vs 347k exp and 343k prev.
  • The pace of preannouncements is stepping up according to the FT, making analysts nervous ahead of the Q2 earnings season. 73 companies have warned so far this Q vs. 29 positive preannouncements (in Q1 the ratio was 67/44). FT


  • Europe will outline a banking union proposal at the upcoming June 28-29 summit. Officials hope to have the necessary treaty changes and key dates set out by year-end. According to the FT, the union blueprint will call for Eurozone states to surrender bank oversight authority, give up some control over national budgets, and explore the pooling of certain risks such as deposit insurance and raising debt. The roadmap also will discuss the potential for Europe’s “firewalls” to inject equity directly into banks. The draft will be circulated Mon (June 25) ahead of the June 28-29 summit.
  • Spain formally requested an aid package for its banks Mon although Madrid and Europe are still attempting to hammer out the precise terms of any deal. According to DJ Moody’s plans on downgrading Spanish banks later Mon
  • the German chancellor has agreed to a joint borrowing plan to help ease local borrowing costs. Germany’s federal and state governments plan their first joint debt sale in 2013 – Bloomberg

Upcoming Data:

  • Tues: US Consumer Confidence, RichmondFed, South Korea Business Survey
  • Wed: German CPI, US DGO, Pending Home Sales, Japan PMI
  • Thurs: EU Summit, German Unemployment, US Initial Jobless Claims, UK Consumer Confidence, Japan CPI
  • Fri: EU Summit, EU Money Supply, CPI Estimate, CanadaGDP, US Personal Spending, PCE Deflator, Chicago PMI, UMichigan Confidence

Commentary & Links:

Market commentators appear to be broadly in agreement that US housing has turned a corner. While few are expecting sharp gains, most analysts appear to be projecting modest price gains over the forecast horizon. Futures on the Case Shiller index are pricing in a total gain of ~6% through Nov 2014.

I’m not a housing expert. But I want to highlight one factor that may be skewing recent house price performance, and by extension, analyst forecasts. Effective 30yr mortgage rates have fallen by 270bps since 2008, and 70bps over the past 12 months. This means that monthly payments on a US median existing home (~180k) has fallen from 1163/mo to 907/mo to 860/mo. This is a 26% drop over the past 4 years, and a 5% drop over the past 12 months.

The point here is that the sharp drop in monthly payments is likely to have had a very large positive effect in favor of the economics of buying vs renting. The chart below shows the US pending home sales index vs the 1y change in the 30y effective mortgage rate. As the chart shows, historically, a large sustained drop in the mortgage rate tends to have a significant positive effect on the number of transactions.

The problem here is that at 4%, the effective mortgage rates really don’t have much more room to fall. 10y Treasury yields are unlikely to fall below 1%, and the cost of servicing and hedging mortgage prepayment risk can’t fall much below 2.5%. By extension, that suggests that some of the support for the housing data recently will fade. How house prices and transactions evolve after that, in an environment of minimal real wage growth, is likely to provide a much cleaner picture of whether this stabilization in US housing is real.

Separately, the BIS annual report is long, but has some good stuff.
Some select charts: