Solarbird (solarbird) wrote,
Solarbird
solarbird

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MBS update and beyond

Good evening.

Following up on the US numbers, Canadian unemployment today rose to 8.4%, vs. expectations of 8.2%, up from 8.0% a month ago. Losses were concentrated in Ontario, and in manufacturing jobs, which is no coincidence; Manitoba, Nova Scotia, and Saskatchewan actually had net job gains, and everyone else remained basically flat.

Here, have Mish Shedlock's monthly analysis of the US jobs report, which can be summed as, "At this point in the cycle birth death numbers should have been massively contracting for months. The BLS is going to keep adding jobs through the entire recession. This is a complete joke."

I don't have the final chart, but the benchmark FNMA 30-year MBS market fell 30 32nds today, which will put 30-year conforming mortgages up another couple of ticks - some end-of-date rate sheets kicked the number up to 5.75%, wholesale numbers somewhere around 5%ish. (Sorry, I don't have direct access to these charts, they all want money.) Given that the Fed's target was 4% to boost housing, I think they've missed pretty well at this point.

Even before the last couple of days, though, home loan demand had started to crater, thanks to last week's action. On Black Wednesday action alone, week-to-week mortgage volume dropped from around US$500 million a day to $215 million/day at GMAC Lending, and that was at 5.15%. That's now up to 5.75% and climbing; I would expect numbers to crater further. GMAC is only one lender - one that's gotten a lot of taxpayer dollars - but they're a substantial one.

The TNX is also behaving very badly, with technical indicators suggesting a rate rise up to around 4.3%, which would correspond (given the usual correlations of bond and T-bill rates) to 30-year conforming non-jumbo mortgage rates of around 6.5%.

The two-year Treasury futures market, and I want to emphasise futures market, not actual two-year, did something very, very disturbing today. (Chart seen on Tickerforum, courtesy tf:Northwoodspete.) This would imply the yield curve steepening is going to get worse - that's if the futures market is correct - and move down to the two-year T-bill. That would be bad.

Mish has some numbers from the Bureau of Economic Analysis showing that the percentage of personal income coming from government support in 1Q 2009 was at the highest level since 1929:
Benefits, such as Social Security, food stamps, unemployment insurance and health care, accounted for 16.2% of personal income in the first quarter of 2009... the highest percentage since the government began compiling records in 1929.
Also, the USDA reports that 11% of Americans - 1 out of every 9 - is receiving food-stamp assistance. Over here is an interactive map to US state unemployment funds. Cascadians may be amused to note that Washington has borrowed no money and has $3.66B in the trust fund; Oregon has the second-largest trust fund (and zero borrowing) at $1.68B. So, um, go us, I guess.

Drs. Barry Eichengreen (UCal Berkeley) and Kevin O'Rourke (Trinity College/Dublin) have posted a bunch of charts tracking the global economy against the Great Depression. On a months-since-start basis, globally, the industrial-output drop by percentage is remarkably similar, and the stock market drop by percentage is considerably worse. World trade is also dropping off more quickly than post-1929. You can look over the charts yourself; they start their current-event calendar at April 2008. They note: "The good news, of course, is that the policy response is very different. The question now is whether that policy response will work. For the answer, stay tuned for our next column."

Europe is quite worried about Latvia as a debt crisis there triggers fear of a currency failure throughout the Baltic nations. European exports and spending both fell off a bit of a cliff last quarter, as well.

US retail numbers were really quite poor in May (mp3, Marketwatch). America's Research Group's Britt Beamer (yes, really) reports that they are "absolutely shocked" at the results, in large part because Memorial day fell entirely in May. June sales are usually 20% Memorial Day and post-Memorial Day sales, but all of that was in May this year, and despite that May sales were very poor. AMG reports that buyers are only interested in advertised loss-leader sales. "98% of consumers are feeling pressure on their spending... I can see why the numbers are this bad, they're just... worse than I thought they would be." However, Wal-Mart does not report monthly sales, and there is some expectation that that Wal-Mart's sales may have balanced this out. Higher-end retailers have been doing the worst. Mr. Beamer thinks June could be down 4-6%, "which would be unheard of."

On a related note, consumer borrowing in April (May figures are not yet available) fell US$15.7B, the second-largest decline on record, and more than double the expected decline. The largest decline was the month before, in March; March's $16.6B decline was originally reported as $11.1 billion, a monumental revision. I am hearing lots of anecdotal noise about card cancellations and limit-hammers and demands for immediate payoff-or-rate-hikes-to-25%-range, al on people with supposedly good credit and no history of missed payments. I stress these are anecdotal, but the noise level is getting pretty loud.

Karl Denninger has a column on the collapse of the government programme to buy bad assets from banks for over-market values (the PPIP or Public-Private Investment Program) because the overpayment wasn't enough: The New York Times reports:
Many banks have refused to sell their loans, in part because doing so would force them to mark down the value of those loans and book big losses. Even though the government was prepared to prop up prices by offering cheap financing to investors, the prices that banks were demanding have remained far higher than the prices that investors were willing to pay.
Fundamentally, the banks cannot afford to have these assets priced at their actual value, or their insolvency becomes too apparent. As Karl translates it:
The banks are still carrying these "assets" at well-above their actual market value. This means their balance sheets are showing them to be healthier than they really are.

The Government, which claimed it was going to "drain the swamp" and get the market moving again, tried everything short of the barrel of an M-16 in the mouth of people like Blankfein and Pandit, but couldn't get them to sell.

But rather than force the recognition of market prices on the balance sheets, which would force these banks to either sell or be FDIC'd (incidentally, the only correct pair of options the banks should have) the government instead is allowing the banks to continue to lie about the market value of these "assets" and carry them above what the market will pay - that is, they are allowing the continuing intentional distortion of so-called "book value", reserve ratios and soundness.
Relatedly, Kevin Depew has a bit of video commentary on the end of the credit crisis showing that the fundamental debt crisis underneath it is still going strong.

Brad Setzer has yet another interesting column on the US-China relationship, and the inadvisability of China and the US "doubling down," with China continuing to buy US assets at current rates.

The US dollar rose today, with the DX rising to around 80.7, apparently entirely in response to the jobs figure discussed this morning. The Canadian dollar fell against the US currency to US89.3¢. Oil fell slightly to US$68.38. The Baltic Dry Index broke 4,000 on Thursday, before falling to 3809 today, a rather healthy number for shippers, tho' it doesn't really say much directly about volume since we know shippers have drydocked many boats at this point, but not how many.

That's all for now. Have a good weekend!
Tags: economics
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