Archive for August, 2010
Treasuries rose, erasing their losses from last week, after the Bank of Japan said “uncertainty” regarding the American economy is growing, reviving demand for safety.
U.S. government notes headed for a fifth monthly gain as the BOJ’s expansion of a bank-loan program fell short of traders’ expectations. The Federal Reserve bought $360 million of Treasury Inflation Protected Securities, the least amount since it resumed buying government debt this month.
“The market was looking for a broader expansion of the package from the Bank of Japan and stronger steps to shore up their market,” said Christian Cooper, senior rates trader in New York at Jefferies Group Inc., one of the 18 primary dealers that trade directly with the Fed. “The increasing uncertainty that was mentioned also set the tone for the bid this morning. It’s positive for fixed income.”
Republicans are eyeing the powerful chairmanship of the House financial services committee held by Barney Frank, the Massachusetts Democrat, as one of the biggest spoils of victory in November’s midterm congressional elections.
Mr Frank, whose sharp tongue makes him one of the Democrats’ most formidable congressmen, pushed through Wall Street reform against Republican opposition and will have a key role in determining US housing policy should his party retain its majority in the House. Polls show control of the House of Representatives is too close to call while the Democrats are expected to retain control of the Senate, albeit with a reduced majority.
[Update 1: revises downward Moody's CMBS delinquencies]
According to Capital Economics' U.S. Quarterly Outlook, business investment in Q210 rose 17%. However, Moody's Analytics reported last week that commercial mortgage-backed security delinquencies spiked since after Sept. 2008, passing 6.4% by March 2010.
Moody's said small business are being forced to de-leverage because they cannot get adequate access to credit. Moody's cited the National Federation of Independent Business, a nonprofit research firm that partners with firms such as Bank of America and FedEx, which found a net 13% of small businesses found credit harder to get in July. The record high is 16%.
The chart below, from JP Morgan's Securitized Products Weekly report, shows the decline in loans distributed to the commercial sector from Sept. 2008 to Aug. 2010. In Oct. 2008, small business loans exceeded large business commercial loans at just under $850 billion. Small business commercial investments now barely exceed $380 billion. Loans for larger businesses is now at $390 billion.
Non-financial non-corporate businesses include not only small operators but also larger companies structured as limited liability entities, said Ben Garber, the author of the Moody's report. "These firms that rely on bank credit saw their total debt decline by a record 8.3% yearly in the first quarter to $3.5 trillion. With small businesses employing half of all workers, credit constrictions in this sector are a large factor in the sluggish hiring pace."
Thomas Hoeing, president of the Federal Reserve Bank of Kansas City, said he expects commercial real estate to continue to be a drag on bank earnings for quarters to come, as HousingWire reported last week. The National Association of Realtors' Commercial Real Estate Index found 88% of respondents said commercial real estate development is virtually nonexistent in their markets.
Garber anticipates this trend will only accelerate, especially in lieu of home price declines.
"With both commercial and residential real estate potentially facing further price declines, a similarly rapid rate of credit expansion is not in the pipeline."
Write to Christine Ricciardi.
Just when I thought the housing market was finally being left to correct on its own, I'm starting to hear talk regarding yet another home buyer tax credit. From HUD to the hedge funds, it sounds as if it is gaining steam yet again. This one could involve not just first time/move-up buyers, but a credit for buyers purchasing foreclosed properties or short sales (when the bank allows you to buy a home for less than the value of the outstanding mortgage).
Last week, HousingWire posed the same question.
The fiscal stimulus plan, formally known as the American Recovery and Reinvestment Act, signed into law by President Obama in February 2009 has succeeded in everything it planned to do, in theory. It designated the majority of funding toward the people who need it the most and at the most crucial time they need it. But Jason Saving, senior economist at the Federal Reserve Bank of Dallas, doubts the plan is showing the anticipated results in practice.
He said the bill, which was expected to raise GDP by one to three percentage points as well as lower the unemployment rate by half a percentage point, is relying on the 'would-have'/'could-have'/'should-haves' for an actual degree of success.
"Simply put," Saving said in his report released this month, "there's no way to know how badly the economy would have performed in the absence of fiscal stimulus and no way to prove how many jobs would have existed without stimulus."
Traditional economic stimulus encourages saving and investment. This enables the economy to grow at a faster rate over the longer term and provides citizens with higher living standards. Savings said the most recent stimulus package the government is backing, emphasizes the need for consumption and spending and focuses primarily on stimulating the economy in the short-term.
Saving proposes an analogy: suppose everyone were given economic "seed corn" and offered the choice to either eat it or plant it. Eating the seed provides an immediate benefit through temporary satisfaction, but reduces the size of future harvests. Planting the seed means temporary discomfort, but better future harvest.
Saving says both are necessary, "but tipping policy toward eating over planting undermines future growth." The government is accomplishing this, he says, by allocating stimulus funds for, the people who need them, yes, but also the people who are most likely to spend them — the people who will eat the seed if you will.
Funds from the fiscal stimulus can be divided in to three categories: direct spending (which goes directly to citizen benefit plans such as Medicaid or unemployment programs), discretionary spending (which goes to federal and state agencies for projects such as roads and schools) and tax cuts (money that goes primarily to Making Work Pay credit of $800 per couple once a year).
As noted by the chart, the majority of these funds are allotted to direct spending.
"Research suggests that unemployment insurance extensions and other programs that target individuals who have high marginal propensities to consume provide the greatest fiscal bang for the buck, creating considerably more short-run economic activity than they displace," wrote Saving.
He breaks down the funds by category (see chart below), stating that the programs or subdivisions that receive the least amount of funding provide little short-term boost, but account for long-term benefits.
Even with the stimulus package, the unemployment rate soared above economic predictions (around 8%). All-in-all Saving says, while the fiscal stimulus provided a short-term economic boost, he's not convinced it will last, especially with the federal deficit currently at $1.4 trillion and expected to remain above $500 billion annually for the next decade.
"While the overall weight of the evidence suggests the stimulus plan has provided a short-term boost, it’s unclear exactly how large this boost has been," concluded Saving. "What is clear is that stimulus funds have exacerbated near-term fiscal imbalances."
Write to Christine Ricciardi.
The Bank of Japan added 10 trillion yen ($118 billion) in liquidity injections after a surge in the nation’s currency to a 15-year high threatened economic growth.
The BOJ boosted the facility to a total of 30 trillion, the bank said in a statement after an emergency meeting in Tokyo. Governor Masaaki Shirakawa said in a press briefing that the bank is ready to take more action if necessary, and cited risks to its view that the economy will remain on a recovery track.
Singapore said Monday it would increase the down payment required on second-home purchases and broaden government duties on the sale of properties held for less than three years, in an effort to cool rapidly rising prices.
The moves coincided with warnings from a government official of mounting risks from the fallout of a collapse in prices.
