2015.02.25 News


Let’s begin with the United States where house price appreciation (per Case Shiller index) seems to have leveled off above 4% per year. Both the National Association of Realtors (NAR) and Case Shiller seem to indicate a more even price growth across the various regions than in the past.

US house price appreciation continues to trend significantly above wage growth – which has been around 2%. This tells me that homes are becoming increasingly unaffordable for a large portion of the population. With rents also rising faster than wages and new construction remaining subdued, lack of affordable housing may become a serious issue for the US in years to come.

The media has been buzzing about the growth of treasury and agency MBS holdings (“safe bonds”) at banks. Indeed the absolute levels have risen above $2 trillion

What do these banks know that we don’t Why are they hoarding safe bonds?

This is absolute hype. Yes, banks are holding more treasuries and agencies in order to comply with regulatory liquidity ratios. These bonds are also exempt from the Volcker rule unlike corporate debt. But whatever the case, “safe bond” holdings as a percentage of total bank assets are not that extraordinary. But the headlines sure get the website clicks, etc.

According to the latest report from Markit, the US service sector has regained momentum in February. Markit’s economists are quite positive about an early Fed hike.

Now a few developments in emerging markets:

1. Turkey cut its benchmark interest rate today. It’s a dangerous move with lira trading near record lows. This could get really ugly if the Fed were to hike rates later this year and we get a repeat of “taper tantrum”.

2. Nomura points out that foreign currency denominated debt across emerging markets is actually much higher than typically reported because of offshore bond issuance. This will also quickly become problematic should the Fed decide to move on rates and the US dollar appreciates further.

3. A number of emerging market nations are entering deflation as falling prices spread from the wholesale level to the consumer. I discussed Singapore yesterday – here is more.

4. Venezuela continues to unravel as violent protests spread.

5.The Ukrainian currency (hryvnia) shed another 16% today. What a disaster.

Here is the timing expectation for the next rate hike for the US, the UK, and the Eurozone (as expectations evolved over time). As I said before the timing for the US looks a bit aggressive, but the policy divergence is impressive: Sep-2015 for the US, Feb-2016 for the UK, 2019 for the Eurozone (from Charlie Bilello).

Easy monetary policy works well in boosting stock markets. YTD top 10 best DM performers are all in nations where central banks have eased. What does it mean for US equities when the Fed decides to initiate liftoff?

Now a couple of notes on the energy markets.

1. There is an argument to be made that a good portion of the collapse in crude can be explained by stronger dollar. The dollar explains half the variance in crude oil price movements. Quite surprising actually.

2. Wind power capacity and generation has been rising significantly in Texas. Two questions:
A. How much of this is driven by tax credits?
B. What will happen to this trend given persistently low natural gas prices?

For those who love stock picking, consider the following chart showing the percentage of shares beating the market. When you make you selection, you better be right or your portfolio will underperform. This certainly argues for index investing.


– US Fed chairwoman Janet Yellen laid the groundwork for the end of zero interest rates yesterday. She said the labour market had improved and the central bank will start tightening monetary policy when it is “reasonably confident” that inflation will move back to its 2 per cent objective. US stocks rose to record highs after her comments, while Treasury bonds and the dollar saw some choppy trading. The momentum did not carry over into the Asia-Pacific region, where bourses weremuted this morning. (FT)
– Greek reforms approved Eurozone finance ministers approved Greece’s proposed economic reforms. Parliaments now have to approve the bailout extension before it expires on Saturday. Kerin Hope examines the key pledges to see where Greek finance minister Yanis Varoufakis has room for manoeuvre. (FT)
– Eurozone banks need better capital Daniele Nouy, the ECB’s chief banking supervisor, said some of the bloc’s biggest banks will need to raise more and better-quality capital because of the clampdown on national exceptions to capital rules. She said fresh legislation from Brussels was likely to be necessary. (FT)

Fast FT

– Turkish central bank cuts interest rate again
– US housing rebound “faltering,” Case-Shiller warns
– Eurozone approves Greek reform proposals
– IMF, ECB voice concern at Greek reform proposals
– Yellen seeks wiggle room on patience pledge
– BoC’s Poloz hits Loonie before blackout
– HSBC China manufacturing PMI beats expectations
– Janet Yellen’s testimony: key extracts

On the labour market

Long-term unemployment has declined substantially, fewer workers are reporting that they can find only part-time work when they would prefer full-time employment, and the pace of quits–often regarded as a barometer of worker confidence in labor market opportunities–has recovered nearly to its pre-recession level.

However, the labor force participation rate is lower than most estimates of its trend, and wage growth remains sluggish, suggesting that some cyclical weakness persists. In short, considerable progress has been achieved in the recovery of the labor market, though room for further improvement remains.

On the drop in oil prices

The bulk of this decline appears to reflect increased global supply rather than weaker global demand. While the drop in oil prices will have negative effects on energy producers and will probably result in job losses in this sector, causing hardship for affected workers and their families, it will likely be a significant overall plus, on net, for our economy.

Primarily, that boost will arise from U.S. households having the wherewithal to increase their spending on other goods and services as they spend less on gasoline.

On the global economic backdrop

Foreign economic developments, however, could pose risks to the outlook for U.S. economic growth. Although the pace of growth abroad appears to have stepped up slightly in the second half of last year, foreign economies are confronting a number of challenges that could restrain economic activity.

On inflation

The Committee expects inflation to decline further in the near term before rising gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate, but we will continue to monitor inflation developments closely.

On when raising interest rates

The FOMC’s assessment that it can be patient in beginning to normalize policy means that the Committee considers it unlikely that economic conditions will warrant an increase in the target range for the federal funds rate for at least the next couple of FOMC meetings.

If economic conditions continue to improve, as the Committee anticipates, the Committee will at some point begin considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis.

Provided that labor market conditions continue to improve and further improvement is expected, the Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when, on the basis of incoming data, the Committee is reasonably confident that inflation will move back over the medium term toward our 2 percent objective.


– Germany’s Budget Surplus Strengthens Hand in Dealing With Vulnerable Eurozone Economies
– The Bank of England Dove Hunt Is On
– The IMF Slammed Greece’s Proposed Overhaul to Its Bailout. Here’s Why It Matters



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