The US census bureau figures today on new home sales in May are pretty rotten: at a seasonally adjusted, annualised rate of 300,000 they are the worst since the series began in 1963.
Yet the Federal Reserve contented itself with saying that “housing starts remain at a depressed level”. I think it’s likely that they’ll be looking at something like the chart below, and concentrating on the six-month moving average (in pink), rather than the absolute number (the bars).
What’s causing the foreclosure crisis? Is it the correction in home prices across the US from bubble-induced highs or is it, as many claim, a result of lax lending standards and predatory subprime loans?
The distinction isn’t just splitting hairs. Governors of the Federal Reserve and other policy makers have put quite a bit of effort into blaming failures of mortgage regulation (rather than market failures) for the crisis. But are no-income McMansion moms really the ones feeding the foreclosures? Or are otherwise credit-worthy homebuyers defaulting as they realise they owe hundreds of thousands more than their home is worth? After all – I can afford to pay back a loan of $500, but if I’ve used it to buy a tulip bulb that’s now worth $1.50, I might just decide to cut my losses and give it to the bank to garden.
Crunching the numbers leads to some interesting, if inconclusive, results.
The most striking change in the Federal Open Market Committee statement released a few minutes ago in my view was the clear shift in the assessment of US financial conditions. In April, they were “supportive of economic growth”. Today, they had “become less supportive of economic growth on balance, largely reflecting developments abroad”. Thanks, European sovereign debt crisis.
That was not the only downgrade in the Fed’s economic outlook. Housing starts could no longer be described as having “edged up”. Instead, they simply remained at a “depressed” level. The labour market was “beginning to improve” in April and one could have at that point expected an acceleration in job creation by this meeting.
Instead, officials only noted that the labour market was “improving gradually” – a cautious tone that was no doubt caused by the weak payrolls report for May. Finally, the overall recovery is simply “proceeding”, not strengthening as it was in April.
No change in the Fed funds rate. And no change in the extended period language. But, lest readers begin seeing monthly Fed funds meetings as uneventful, there has been a relatively interesting change in the Fed’s view of financial conditions.
From today’s statement:
The US government can borrow from the market for five years at a rate 2.6 percentage points lower than for Portugal. Bond yields continue to fall for medium-term US debt (they fell yesterday for 2-year bonds too), even though very short-term debt rose (4-week treasuries reverse trend (Jun 22)).
The medium yield was 1.925 per cent, down from 2.07 per cent at the last auction on May 26. Tomorrow is the 7-year auction: on current trend, the rate will be lower than a month ago, when it was 2.75 per cent.
Portugal can still raise medium-term debt in the markets, but only at a price. Five-year bonds just auctioned at a weighted average yield of 4.657 per cent, IGCP figures show. This is a sharp increase from 3.701 per cent for the same maturity bonds auctioned last month (see chart). Demand for the issues were stable, with a bid-to-cover remaining at 1.8, and €943m bonds sold.
Had the yield been much higher, Portugal might have been as well off turning to the European Stability Fund, where 5 per cent is mooted as a likely charge. On that score, Portuguese banks are leading the way: funding from the ECB more than doubled last month to €36bn.
Rates have been lowered another 50bp in Iceland, justified by a rising krona and lower risk premia. Since the last MPC meeting, the krona has risen 5 per cent against the euro, “slightly more than assumed” by the central bank in its last forecast. Unlike last time, inflation is currently falling.
The central bank has also been repurchasing 2011 and 2012 euro-denominated bonds – €160m and €32m, respectively. The move is an effort to reduce reliance on external funding. Bilateral credit lines with Denmark, Finland, Norway, Poland and Sweden totalling €639m are being used to supplement the bank’s foreign exchange reserves.
On the subject of reserves, the bank explained:
Over time, the Central Bank will have to replace borrowed reserves with non-borrowed reserves. The appreciating króna and lower external risk premia could allow modest regular purchases of foreign currency. The timing and quantity of such purchases will be conducted so as to minimise the effect on the króna. No decisions on such purchases will be taken before the August MPC meeting.
The eurozone’s economic growth spurt is showing fresh signs of losing momentum with a closely-watched survey flashing warnings of a slowdown ahead. June’s purchasing managers’ indices for the 16-country region indicated that the brisk pace of export-led economic expansion seen in the second quarter of this year marked a peak in the upswing.
The latest readings could heighten worries of a lacklustre eurozone economy being hit increasingly by recessionary conditions in southern Europe, as well as fiscal austerity measures and weaknesses in banking systems across the continent.
The abuse of the word “progressive” continues. In his Budget speech yesterday, George Osborne said:
“Overall, everyone will pay something, but the people at the bottom of the income scale will pay proportionally less than the people at the top. It is a progressive Budget.”