Could the Next Fed Appointment Crush the Housing Market?

As the end of Federal Reserve Chairwoman Janet Yellen’s first term approaches, financial markets are beginning to digest the increased likelihood that US President Donald Trump will opt to appoint a more hawkish individual to the position.  Even though the Federal Reserve is largely expected to continue tightening monetary policy over the coming months as it pares down the balance sheet and contemplates a dovish hike, Trump’s appointment could send shockwaves through the housing market. 

One of the nastier side effects of operating at or near the zero-bound for interest rates has been the rapid expansion of asset valuations.  Lower interest rates encourage individuals and companies to finance their purchases and then reinvest for more aggressive returns. However, this rapid valuation expansion has not been limited strictly to financialized assets, but also physical assets like real estate.  When seen in the context of the more hawkish leanings of Trump’s recent Fed Chair interviewees, the Administration’s next Fed appointment could pose the risk of a serious correction across asset classes.

Fed Frontrunners Exhibit More Hawkish Bent

Financial news outlets have been rife with reports covering the potential picks for Fed Chairman, with two of the leading candidates including Economist John Taylor and former Federal Reserve Governor Kevin Warsh.  Taylor, who currently serves as an economics professor at Stanford University, received high marks from Trump according to a Bloomberg report on the matter.  Trump was purportedly very impressed with his credentials, though unlike other candidates, Taylor is among the fiercest advocates of having policy measures closely reflect economic conditions.  

The “Taylor Rule”, titled after the economist, stipulates rates should rise when inflation is running at an elevated pace or unemployment is below the “full employment” threshold and should fall in the opposite scenario.  Applying this set of rules to current economic conditions indicates that the key Fed Funds rate should be 3.74% to reflect high levels of employment and rising prices.  At nearly 3 times the present rate, a selection of John Taylor to chair the Fed could rapidly dampen overextended valuations in equities and the housing market.  Already his interview with Donald Trump caused a palpable dip in gold prices considering his overtly hawkish stance.

By comparison, Kevin Warsh has also advocated for a tighter monetary policy regime, greater deregulation, and a general makeover of the Central Bank.  His attitude towards reform has won him positive mentions as well.  However, his overall degree of hawkishness and stated desire to overhaul the inflation target could put him at the epicenter of a dramatic policy shift that departs from the more cautious approach of current Chair Janet Yellen.

Factors Outside the Fed’s Control

While easy to label the rebuilding efforts in Texas and Florida as positive for the overall housing market, this deals more with the supply angle than demand.  On the buy side, a Fed determined to raise interest rates will assuredly presage rising mortgage costs which could in turn subject buyer interest to some downside as financing costs climb.  Though it is tempting to cite the foreclosure rate at an 11-year low as a sign of strength, it does not necessarily imply that the housing market is on stable footing, especially as prices reach past the realm of affordability.

Considering income growth has kept nowhere near the same pace as price growth for homes according to the monthly Case-Shiller home price index, the lack of affordable solutions may be another factor that hurts demand and concurrently weighs on pricing.  For the year through July, average hourly earnings climbed by 2.50% while housing prices of 20 major US metropolitan areas increased by 5.80% over the same period. With price growth outpacing wages by such a significant margin, the surge in values should be a worrying sign for prospective buyers thinking about diving in while mortgage rates remain not far from record lows.

However, a more concerning indication apart from unaffordability is the degree to which flipping has reemerged.  The move is eerily reminiscent of the years leading up to the last financial crisis as lending standards are relaxed.  House flipping reached the highest point since 2007 during the second quarter of 2017 and nearly 35% of the transactions were accompanied by mortgages.  Even Goldman Sachs is getting into the flipping game with its recent acquisition of Genesis Capital LLC, a move designed to help the institution build a bigger presence in the lending sphere.  Should mortgage rates rise in tandem with interest rates, it could spell doom for this substantial portion of residential real estate activity.

The Fed as the Deciding Factor

With the shortlist for the next Federal Reserve Chair realistically narrowed down to 5 candidates, those under consideration for the job have significantly more hawkish leanings than current Chair Janet Yellen and her predecessor Ben Bernanke.  While ultimately housing prices are a function of the interaction of supply and demand, demand largely behaves inverse to interest rates.  As rates climb, mortgage costs will echo the gains, potentially reducing interest.  Should demand fall, housing prices are likely to experience a correction as well after a near 8-year unabated rise in values.  Considering the unaffordability aspect and the degree of house flipping, the approaching Fed appointment has a higher propensity to cause a downturn compared to another leg of the ongoing housing market rally.

 

 

No, Harvey Won't Help America's Flagging Housing Market

Authored by Danielle DiMartino Booth via DiMartinoBooth.com,

Something is up, or more likely down, with the U.S. housing market. And the reconstruction after Hurricane Harvey may not do much to help.

Here"s the evidence:

The latest take on home-builder sentiment showed that buyer traffic stubbornly remains in negative territory, despite some of the highest readings of the current cycle on builders" expectations for sales gains in the next six months.

In addition, recent mortgage rate declines have not led to an increase in applications to buy a home. Over the past few weeks, purchase activity has slumped to a six-month low, even though rates are at their lowest level since November. This defies a central tenet of the housing market that falling rates naturally lead to an uptick in sales.

As for actual sales volumes, both new and existing July home sales missed forecasts by wide margins. At an annualized rate of 571,000, new home sales dropped to a seven-month low, well off their long-term average pace of 727,000. The number of homes on the ground rose to 276,000 units, the highest since June 2009. At July"s pace, it would take 5.8 months to clear the inventory.

The existing home sales report that followed was similarly weak, with closings sliding to the lowest since August 2016. Not only was the 5.44-million annualized pace 110,000 units below forecast, July"s figures reveal the all-important spring selling season was something of a bust, given July"s data captured contracts signed from April through June.

Prices have been and remain the main impediment. The median new home sales price of $313,700 marked the highest July price on record and is up more than six percent over last year"s level. At an annual gain of 6.2 percent, the best that can be said of the median sales price for previously occupied homes is that it"s off the record pace it set in June. Corroborating the slowdown in sales, both the Federal Housing Finance Agency and S&P Case-Shiller home-price indexes have softened unexpectedly.

As has been the case since housing collapsed over a decade ago, the missing contingency in the current recovery is the first-time home-buyer. In a normal market, first-timers comprise 40 percent of buyers. In July, they made up a third of the market, which is one of the highest reads of the current cycle.

What"s certain is that the run-up in home prices has not been helpful for millennials aiming to stop renting or even move out of their parent"s homes. The latest results from the University of Michigan Survey of Consumer Confidence Sentiment speak volumes. While all buyers have expressed dismay at home price gains, those between the ages of 18 and 34 have been particularly alarmed.

The survey also showed an expanding pool of those with a dour perception on housing. Thanks to high prices, both upper- and lower-income cohorts as well as those in the West and the South now say they"re pessimistic about buying a home. Likewise, prime-age buyers (ages 35-54) are now echoing their younger counterparts" laments about prices.

Looking ahead, pending home sales suggest the summer"s data are anything but an aberration. The pending home sales index has fallen in four of the last five months, with July coming in particularly weak, down 0.8 percent compared to the consensus forecast, which called for a rise of 0.4 percent.

For years, Lawrence Yun, chief economist at the National Association of Realtors, has cited constrained inventories of homes as the main driver of any weakness in the sales figures. After the recent spate of disappointments on the pending home sales front, Yun added the following perspective on prices: Over the past five years, median home prices have risen 38 percent while hourly earnings have increased by just 12 percent. This yawning gap has pushed affordability to its lowest level since 2008.

Tellingly, the most recent data from Challenger, Gray & Christmas revealed a jump in construction worker layoffs. The mitigating factor will be the tremendous demand for workers to repair and eventually rebuild Houston and the surrounding region after the devastation wreaked by Hurricane Harvey.

What is less of a certainty is the long-term effect of the storm. About 1.2 million homes in and around Houston were at moderate to high risk for flooding but aren’t in a designated flood zone that would have required insurance. Many will qualify for federal disaster relief. Still, the government program comes in the form of low-interest rate loans to help shoulder the burden of repair costs at a time when many households are already buried in debt with precious little in savings; as the third quarter got underway, the saving rate fell to 3.5 percent, a fresh low for the current cycle.

Although many have drawn comparisons to the aftermath of Hurricane Katrina, Harvey will affect more than twice as many mortgaged properties. According to Black Knight Financial Services, of the 1 million or so mortgaged homeowners in the disaster area, more than 300,000 could become delinquent within two months, and 160,00 are at risk of becoming seriously delinquent inside a four-month period.

As per the Mortgage Bankers Association, homes in foreclosure nationwide totaled 502,437 in the second quarter, exemplifying the very real potential for Harvey to leave a huge scar on the housing market.

It is clear investors are banking on the rebuilding effort becoming its own macroeconomic engine of growth. With housing clearly peaking, the nearer-term risk is that Harvey’s devastation solidifies broader market woes.

"That's The Wrong Way To Go" - Robert Shiller Slams America's "Excessive Lust For Wealth"

Authored by Robert Shiller, originally posted op-ed at The New York Times,

The Transformation of the ‘American Dream’

“The American Dream is back.” President Trump made that claim in a speech in January.

They are ringing words, but what do they mean? Language is important, but it can be slippery. Consider that the phrase, the American Dream, has changed radically through the years.

Mr. Trump and Ben Carson, the secretary of housing and urban development, have suggested it involves owning a beautiful home and a roaring business, but it wasn’t always so.

Instead, in the 1930s, it meant freedom, mutual respect and equality of opportunity.

It had more to do with morality than material success.

This drift in meaning is significant, because the American Dream - and international variants like the Australian Dream, Le Rêve Français and others - represents core values. In the United States, these values affect major government decisions on housing, regulation and mortgage guarantees, and millions of private choices regarding whether to start a business, buy an ostentatious home or rent an apartment.

Conflating the American dream with expensive housing has had dangerous consequences: It may have even contributed to the last housing bubble, the one that led to the financial crisis of 2008-9.

These days, Mr. Trump is using the hallowed phrase in pointed ways. In his January speech, he framed the slogan as though it were an entrepreneurial aspiration.

“We are going to create an environment for small business like we haven’t seen in many many decades,” he said, adding, “So, essentially, we are getting rid of regulations to a massive extent, could be as much as 75 percent.”

Mr. Carson has explicitly said that homeownership is a central part of the Dream. In a speech at the National Housing Conference on June 9, he said, “I worry that millennials may become a lost generation for homeownership, excluded from the American Dream.”

But that wasn’t what the American Dream entailed when the writer James Truslow Adams popularized it in 1931, in his book “The Epic of America.”

Mr. Adams emphasized ideals rather than material goods, a “dream of a land in which life should be better and richer and fuller for every man, with opportunity for each according to his ability or achievement.” And he clarified,

“It is not a dream of motor cars and high wages merely, but a dream of a social order in which each man and each woman shall be able to attain to the fullest stature of which they are innately capable, and recognized by others for what they are.”

His achievement was an innovation in language that largely replaced the older terms “American character” and “American principles” with a forward-looking phrase that implied modesty about current success in giving respect and equal opportunity to all people. The American dream was a trajectory to a promising future, a model for the United States and for the whole world.

In the 1930s and ’40s, the term appeared occasionally in advertisements for intellectual products: plays, books and church sermons, book reviews and high-minded articles. During these years, it rarely, if ever, referred to business success or homeownership.

By 1950, shortly after World War II and the triumph against fascism, it was still about freedom and equality. In a book published in 1954, Peter Marshall, former chaplain of the United States Senate, defined the American Dream with spiritually resounding words: “Religious liberty to worship God according to the dictates of one’s own conscience and equal opportunity for all men,” he said, “are the twin pillars of the American Dream.”

The term began to be used extensively in the 1960s. It may have owed its growing power to Martin Luther King’s “I Have a Dream” speech in 1963, in which he spoke of a vision that was “deeply rooted in the American Dream.” He said he dreamed of the disappearance of prejudice and a rise in community spirit, and certainly made no mention of deregulation or mortgage subsidies.

But as the term became more commonplace, its connection with notions of equality and community weakened.

In the 1970s and ’80s, home builders used it extensively in advertisements, perhaps to make conspicuous consumption seem patriotic.

Thanks in part to the deluge of advertisements, many people came to associate the American Dream with homeownership, with some unfortunate results. Increasing home sales became public policy.

In 2003, President George W. Bush signed the American Dream Downpayment Act, subsidizing home purchases during a period in which a housing bubble — the one that would lead to the 2008-9 financial crisis — was already growing at a 10 percent annual rate, according to the S.&P. Corelogic Case-Shiller U.S. National Home Price index (which I helped to create).

This year, Forbes Magazine started what it calls the “American Dream Index.” It is based on seven statistical measures of material prosperity: bankruptcies, building permits, entrepreneurship, goods-producing employment, labor participation rate, layoffs and unemployment claims. This kind of characterization is commonplace today, and very different from the original spirit of the American dream.

One thing is clear: Bringing back the fevered housing dream of a decade ago would not be in the public interest. In “House Lust: America’s Obsession With Our Homes,” published in 2008, Daniel McGinn marveled at the craving for housing in that era: “In many neighborhoods, if you’d judged the nation’s interests by its backyard-barbecue conversation — settings where subjects like war, death, and politics are risky conversational gambits — a lot of people find homes to be more compelling than any geopolitical struggle.”

This is not to say that homes have no appropriate place in our dreams or our consciousness. To the contrary, in a 2015 book “Home: How Habitat Made Us Human,” the neuroanthropologist John S. Allen wrote, “We humans are a species of homebodies.” Ever since humans began making stone tools and pottery, they have needed a place to store them, he says, and the potential for intense feelings about our homes has evolved.

But the last decade has shown that with a little encouragement, many can easily become excessively lustful about homeownership and wealth, to the detriment of our economy and society.

That’s the wrong way to go. Instead, we need to bring back the American Dream of a just society, where everyone has an opportunity to reach “the fullest stature of which they are innately capable.”

Mark Hanson Reveals "The Next Housing Bubble"

The striking Case-Shiller regional charts shown below, courtesy of MHanson.com, make Mark Hanson angry: "so, 2006/2007 was the largest house price bubble ever, but there is nothing to see here in 2017?" and sarcastically points out that "if this isn"t a house price bubble, I would hate to see one."

His bottom line:

If 2006/07 was the peak of the largest housing bubble in history with affordability never better vis a’ vis exotic loans; easy availability of credit; unemployment in the 4%’s; the total workforce at record highs; and growing wages, then what do you call “now” with house prices at or above 2006 levels; worse affordability; tighter credit; higher unemployment; a weakening total workforce; and shrinking wages? Whatever you call it, it’s a greater thing than the Bubble 1.0 peak.

And visually:

Below are some further observations and "red-flags" from Hanson on Peak Housing, after the latest new home sales data:

• Sharp downward sales revisions for past 3-months.


• Huge downward price revisions for past 3-months, lower by 10%, 5% and 3%, respectively, exactly as I predicted on last month"s release.


• Builders maxed out on pricing power; Med & avg prices flat for 2-years.


• The all-important Southern Region was flat YY; the South makes up over half of all sales in the nation, and drives builder demand and profits.


• 100% of the June YY sales gain came from the Western Region, which doesn"t jibe with the weak price performance and will likely be revised lower next month.


• Income required to buy the avg priced builder house is at historical highs and has completely diverged from the multi-decade trend line.


• Historically low growth & rebound relative to resales suggest "lack of supply" meme in the Existing Sales market is over-stated.

As he says, "Peak builder is here."

Finally some other quantitative and qualitative observations from the housing guru:

1) New Home Sales "up to" 1995 levels after $15 TRILLION in debt and Fed liquidity aimed largely at the sector.

2) Builder pricing power largely flat for 2-years.

3) Income required to buy the average priced builder house has completely diverged from the multi-decade trend line. This obviously explains why sales are only at 600k SAAR now vs 1.2 million in Bubble 1.0. Reversion to this mean will occur...either thru a sharp rise in income; new exotic loan programs, which make payment less; or house prices dropping.

4) Last time builders were this euphoric was the peak of the biggest credit bubble in history.

5) It"s too bad the public isn"t as euphoric about buying as the builders think they are.

Dear Fed, It's Not "Really Hard To Spot Bubbles"

Authored by Wolf Richter via WolfStreet.com, 

Here are some visual aids to help the Fed spot the housing bubble.

Minneapolis Fed President Neel Kashkari was the latest Fed official to claim in an essay – thus following in the time-honored footsteps of former Fed Chair Ben Bernanke – that “spotting bubbles is hard,” that the Fed cannot see them, and that if it could see them, it shouldn’t do anything to stop them because it had only “limited policy tools,” and because “the costs of making policy mistakes can be very high.”

But it’s OK to use these “limited policy tools” to inflate the greatest bubbles the world has ever seen and then preside over the damage they cause to the real economy before they even implode.

Neither Kashkari nor anyone else working at the Treasury Department in 2006 – when they were tasked by Secretary of the Treasury Hank Paulson to look for signs of trouble because they were “due for some form of crisis,” as he writes – could see any bubbles, not even the housing bubble although it was already beginning to deflate.

“It is really hard to spot bubbles with any confidence before they burst,” Kashkari writes, specifically naming stock prices and house prices. “Everyone can recognize a bubble after it bursts, and then many people convince themselves that they saw it on the way up.”

So here are some visual aids I put together for Kashkari and other Fed governors. It will help them “spot” the beautiful housing bubbles in the US – because bubbles really aren’t hard to recognize before they burst, if you want to recognize them.

What’s hard to predict accurately is when they’ll burst.

The S&P CoreLogic Case-Shiller National Home Price Index for March was released today. It jumped 7.7% year-over-year, far outpacing growth in household incomes. This has been the case for years. In fact, real household incomes are almost back where they were in 2006 (/sarc). So what could go wrong?

At 198.26, the index surpassed the peak of Housing Bubble 1 in May 2006 by 11% (data via FRED, St. Louis Fed):

Since everyone called it a housing bubble after it had imploded, even Kashkari, today’s phase in the wondrous market is Housing Bubble 2, no?

The other day, Zillow reported that the national median home value in April rose 7.3% year-over-year to $198,000. It too beat the peak of Housing Bubble 1 ($196,600) set in April 2007. “It only took a decade,” Zillow said.

The National Association of Realtors reported that the median price in April hit $246,100, which is 6.8% above the peak of Housing Bubble 1 ($230,400 in June 2006).

The Case-Shiller Index appears to have more stature at the Fed than Zillow or the NAR. So we’ll use it here in our visual aids for the Fed.

It is based on a rolling-three month average; hence, today’s release was for January, February, and March data. So it’s always behind. Instead of median prices, it uses “home price sales pairs,” for example, a house sold in 2011 and then again in 2017. Its algorithms adjust this price movement over the years and numerous other factors into a data point that becomes part of the index. The index was set at 100 for January 2000. So an index of 200 means prices have doubled in the past 17 years.

Housing is local. Therefore housing bubbles are local. But if enough of them come together at the same time, the housing bubble takes on national proportions. This is the phase, as the above chart shows, that the US has now reached: In some metros, prices are still below the peak; in other metros, prices are setting new records. Overall, prices have surpassed those of Housing Bubble 1.

So dear Fed Governors, please have a look at some of the beautiful housing bubbles around the country. As you’ll see, they’re really not “hard to spot.”

This is the Boston metro, where the current home price index is now 9% above the peak of Housing Bubble 1 (Nov 2005):

Prices in the Seattle metro have surged even more, pushing the index 13% above the peak of Housing Bubble 1 (Jul 2007):

And here’s Denver’s house price bubble, where prices have soared a breath-taking 38% since the prior peak (Aug 2006):

I know that folks in the Dallas-Fort Worth metro felt left out during Housing Bubble 1. I heard many complaints about that at the time. They also missed out on much of the house price crash.

But they sure know how to make up for things. Home prices have now surged by 37% since the last peak in June 2007:

The Atlanta metro isn’t quite back to the peak of Housing Bubble 1, but it’s near-perfect V-shaped bubble recovery will soon hit it:

For the Portland house price bubble, the index is now 14% above the prior peak:

The Case-Shiller Index for San Francisco, which covers the five-county Bay Area, is now 7.7% higher than at the peak of Housing Bubble 1. However, in the city (and county) of San Francisco, the median home price has soared 47% above the prior peak (Nov. 2007). This is the chart for the five-county Bay Area house price bubble-crash-bubble:

The city of San Francisco is also the first city in this lineup where the median home price is now heading south on a year-over-year basis. During Housing Bust 1, the City was late to react. This time, it seems to be ahead of the pack.

And the Case-Shiller index for the condo price bubble in New York City has soared 17% above the prior peak (Feb. 2006), with prices nearly tripling since 2000:

The local housing bubbles across the US blew up with spectacular consequences, all in their own time frames. Plenty of local home price bubbles are now coming together to form a national home price bubble. So it’s really not hard to spot them, Mr. Kashkari.

Sure, there has been some inflation – 17% since 2006, based on the Fed’s favorite core PCE measure. Home prices in some of the cities have already reached a new peak even after inflation. And besides, it’s not a housing bubble until it reaches the inflation-adjusted point where the prior one took down the financial system? Is that the point when Housing Bubble 2 begins, instead of ends? If so, what would Housing Bust 2 look like? A vision too ugly to behold.

What’s hard to predict is the moment when housing bubbles begin to deflate. With monetary policies still in easing mode, with the federal government subsidizing the housing market in numerous ways, and with homes having become a securitized asset class for global speculators, house price bubbles can inflate – as we have seen – far more than a rational human mind might think possible. But we do know that they will deflate.

In San Francisco, the signs and numbers are already lining up. Read…  Will these 2 Forces Crush San Francisco’s Housing Bubble?

"It's Just Crazy" (Again): 2-Bedroom LA House Sells 40% Above Asking

Two days ago we looked at the latest troubling development in US home price trends: a new bubble appears to be emerging in all the "usual suspect" places. As we noted on Thursday, "home prices in markets that bubbled over back in 2006/2007, like Las Vegas and San Francisco, got cut in half in 2009 but have since doubled again of their lows.  Meanwhile, markets like Denver and Dallas that didn"t participate as much in the 2007 mania are now surging to all-time highs, with Dallas prices up 55% over the past 5 years."

The Wall Street Journal added that some of the home buying behaviors of consumers, like paying prices well above appraisal values and waiving home inspections, are starting to be eerily reminiscent of 2006:

In some markets, bidding wars are breaking out. Agents said some buyers are kicking in extra cash when properties don’t appraise for the asking price, and some are waiving their right to home inspections.

“It can’t be sustained,” said David Berson, chief economist at Nationwide Insurance and a former chief economist at mortgage giant Fannie Mae, referring to the frenzied buying. “It can’t go on forever.”

Other signs of overexuberance have emerged, including surging levels of licensed Realtors all chasing a quick buck.

The number of licensed Realtors has jumped by nearly 25% since 2012, hitting a nine-year high in 2016 and sitting just 9% below the peak in 2006, according to real-estate consultant John Burns. In Denver, homes are selling briskly. The median number of days that homes spent on the market declined to eight in the first three months of the year from 61 in 2012, according to Redfin. Home prices rose 8.5% in Denver over the year ended in February, according to Case-Shiller.

Nicki Thompson, an agent in Denver, said she recently had a listing that was on the market for two weekends at $1.2 million and she received multiple all-cash offers above the listing price. 

“It’s just crazy,” she said.

And for a practical example of just how crazy it truly is, take this renovated 2-bedroom, 1,948 sq. ft house first built in 1951 in the Eagle Rock section of Los Angeles, which was listed in mid-March for $699,000, was estimated by Redfin at $780,000, and sold yesterday for $980,888 (more than $500/sq foot) and 40% above asking, just over a month after it was first listed.

Maybe it was the house"s profile "description" that unleashed the buying frenzy:

In the 1960s-80s drums played on some of the most famous pop songs known (Good Vibrations, Mrs. Robinson, A Little Less Conversation, to name a few) were built in this garage in our beloved Eagle Rock. A. F. Blaemire and his wife, Kirsten, filled this home with music and creativity for decades, and now it"s ready for its next inspired owner! With freshly refinished hardwood floors and repainted interior, 5208 Monte Bonito is a blank canvas with great potential. The rooms are bright and spacious, including a downstairs recreation room perfect for a jam room, art studio, den (or all of the above!). The two-car garage has direct access to the house and an additional storage room. The back yard has plenty of space for entertaining and gardening - there is already an avocado tree, an orange tree, and a pitaya to get you started! Views of the Eagle Rock from the master bedroom, and sunset views from the front porch make this the ideal setting to call home.

Then again, maybe not.

So what do you get for just under a million in LA these days? Not much: two bedrooms, less than two bathrooms, a 2 car garage, a decorative fireplace, a rec room, and a 7,195 sq foot lot.

Here are some photos showing what a "million dollar house" looks like in the latest US housing bubble.

Key Events In The Coming Busy Week: US GDP; ECB & BOJ Meetings, And Lots Of Earnings

The key economic releases this week are the durable goods report on Thursday and Q1 GDP on Friday.  It iweek is the busiest week of earnings season, with 40%  of S&P 500 equity cap reporting. In addition, there are a few scheduled speaking engagements by Fed officials this week. 

Further, as SocGen notes, this week, markets will digest the French election results, with data releases focusing on the strength of the euro area recovery. The ECB may signal upside risks to near-term growth ahead of higher core inflation on Friday. EU leaders will meet to adopt Brexit negotiation guidelines. In the US, softer 1Q GDP data will be scrutinized, while rising inflation in the UK may have a longer term impact on growth. In Asia, GDP data should be boosted by net exports while the BoJ may upgrade it economic assessment.

United States: Q1 GDP likely to show weak growth

This week, consensus expects broadly unchanged new home sales as well as subdued business investment (ex aircraft orders). Most of the focus will be on Friday’s Q1 GDP where the Atlanta Fed expects growth to tumble to just 0.5%. Still, the Fed (and markets) is used to softness in Q1 growth that at least in the past has snapped back in the second half. Lastly, a one- or two-week bill looks likely to keep the government open past the Friday deadline, giving Congress a bit more time to work on a longer-term deal.

Euro area: ECB to acknowledge upside risks to near-term growth.

While markets will digest the French election results, the ECB will likely acknowledge upside risks to growth in 1H on Thursday while remaining on hold. Both headline and core inflation should recover by two-tenths on Friday, while the first 1Q GDP estimates for France (0.2% qoq) and Spain (0.7%) will give an early indication for the euro area (next Wednesday). Both the EC confidence indicators and the German Ifo will probably moderate but are expected to remain high. A special summit of EU-27 leaders (Saturday) will set the guidelines for the EU in the upcoming negotiations with the UK.

Asia Pacific: Solid 1Q GDP gains in Korea and Taiwan; BoJ may upgrade assessment

First quarter GDP data from South Korea and Taiwan are likely to have been boosted by net trade, as suggested by the strong external trade recovery across the region. The BoJ is widely expected to maintain its current policy stance and make no meaningful changes to its economic forecasts, but may upgrade its assessment of the economy. In Australia, annual rates of headline and core inflation are likely to have moved up, but not quite into target.

JPM lays out the Calendar of events to watch for in the week of Mon Apr 24

• The big focus this week will be on earnings (the week of 4/24 is the peak of the CQ1 season), central banks (decisions from the BOJ and ECB), Eurozone eco data (Eurozone Arp CPI on Friday 4/28), US eco data (Q1 US GDP and ECI both hit Fri 4/28), and US gov’t funding (legislation to fund the gov’t expires on Apr 28 – a shutdown is considered unlikely).


• Calendar for Mon Apr 24 – the main focus on Mon will be earnings (HAL, HAS, ITW KMB, LII, and TCB pre-open and AA, AMP, CCI, CDNS, CR, ESRX, NEM, RE, RMBS, RRC, SANM, TMUS, UDR, WHR, WNC, WRB, and ZION after the close). 


• Calendar for Tues Apr 25 – the main focus will be on US FHFA/Case-Shiller home prices for Feb (9amET), US new home sales for Mar (10amET), US conf. board confidence figures for Apr (10amET), and earnings (AKS, AN, BHI, BIIB, CAT, CIT, CNC, DD, Ericsson, FCX, FITB, GLW, KO, LH, LLY, LMT, MAS, MCD, MMM, NLSN, Novartis, NTRS, OI, PCAR, PHM, PNR, R, SAP, SPGI, ST, TROW, TRU, TUP, VLO, WAT, WSO, and XRX pre-open and ARNC, BHP, BXP, CB, CENX, CHRW, CMG, COF, CREE, DFS, EQR, EW, ILMN, JNPR, SYK, T, TSS, TXN, UHS, and ULTI after the close).


• Calendar for Wed Apr 26 – the main focus will be on earnings (ALK, ANTM, APH, AVY, BA, BAX, Credit Suisse, Daimler, DPS, GD, HES, HSY, IR, NDAQ, NSC, PEP, PG, ROK, Santander, Standard Chartered, STT, STX, TEL, TWTR, UTX, X, WRK, and WYN pre-open and AMGN, AVB, CAVM, EQIX, FFIV, FISV, KIM, MAA, NOW, NTGR, ORLY, PYPL, SAM, UNM, VAR, XL, and XLNX after the close).


• Calendar for Thurs Apr 27 – the main focus will be on central banks (BOJ, Riksbank, and ECB decisions), China industrial profits for Mar (Wed night/Thurs morning), US advanced goods trade balance for Mar and durable goods for Mar (8:30amET), US pending home sales for Mar (10amET), the expiration of the FCC anti-collusion rules (related to the recent spectrum auction), Trump’s press conf., and earnings (ABBV, Airbus, ALLE, ALLY, AMT, APD, BASF, BMY, BSX, CBG, CELG, CMCSA, CME, Deutsche Bank, DOW, F, IP, IVZ, JCI, LAZ, LLL, LUV, MMC, MPC, Nokia, NOV, POT, PX, Roche, RS, SIRI, SPG, STM, UAA, UNP, UPS, USG, VC, WCC, and ZBH pre-open and AFL, AIV, AMZN, BIDU, CERN, ESS, EXPE, FLEX, FTNT, GOOGL, GPRO, HIG, INTC, KLAC, LPLA, MHK, MSFT, PFG, Samsung Electronics, SBUX, SWKS, SYNA, VRSN, VRTX, and WDC after the close).


• Calendar for Fri Apr 28 – the main focus will be on Eurozone eco data (including Eurozone Apr CPI at 5amET), US Q1 GDP and ECI (8:30amET), US Chicago PMI for Apr (9:45amET), Michigan Sentiment for Apr (10amET), and earnings (CL, CVX, GM, GT, HST, LYB, PSX, SYF, VFC, WY, and XOM pre-open).

Global Economics Calendar: Week of Mon April 24th, also via JPM

• Monday, April 24th: US (Chicago./Dallas Fed Indices); Eurozone (Germany IFO Current Assessment, UK CBI Business Optimism); Other (Taiwan Unemployment Rate, Japan Leading/Coincident Index, Taiwan Industrial production, Taiwan Money Supply, China Conference Board China March Leading Economic Index, Japan PPI Services)


• Tuesday, April 25th: US (FHFA House Price Index, S&P/CoreLogic 20-City HPI, New Home Sales, Conference Board Consumer Confidence Index, Richmond Fed); Eurozone (France Business Confidence, Spain PPI, ECB Bank Lending Survey, UK Public Finances, Euro Area Fourth Quarter Government Debt); Other (Hong Kong Trade Balance)


• Wednesday, April 26th: US (MBA Mortgage Applications); Eurozone (France Consumer Confidence, Spain Total Mortgage Lending, France Jobseekers); Other (Japan All Industry Activity Index, Japan Machine Tool Orders, Japan Buying/Selling Foreign Stocks/Bonds, China Swift Global Payments, China Industrial Profits, BOJ 10-Yr Yield Target, BOJ Policy Balance Rate)


• Thursday, April 27th: US (Advance Goods Trade Balance, Wholesale/Retail Inventories, Durable Goods Orders, Jobless Claims, Pending Home Sales, Kansas City Fed Manufacturing Activity Index); Eurozone (Germany GfK Consumer Confidence, Spain Unemployment Rate, Spain CPI, Germany CPI, Italy Economic Sentiment, Eurozone Economic Confidence, ECB Main Refinancing Rate, ECB Asset Purchase Target, UK GfK Consumer Confidence, Spain Budget Balance); Other (Taiwan Monitoring Indicator, Taiwan Bounced Check Ratio, Japan Jobless Rate, Japan National CPI, Japan Industrial Production, Japan Retail Sales)


• Friday, April 28th: US (Employment Cost Index, GDP Annualized, Core PCE, Chicago PMI, University of Michigan Survey); Eurozone (France GDP, France CPI, Eurozone M3 Money Supply, Spain GDP, Spain Retail Sales, UK GDP, Eurozone CPI, Italy PPI, , UK Nationwide House Prices); Other (Japan Vehicle Production, Japan Housing Starts)

A look at the upcoming busiest week of Q1 earning season:

The CQ1 season isn’t even half over although several important companies posted numbers over the last 1.5 weeks.  As is the case with any given earnings period, the most “important” sectors from the perspective of the macro narrative are banks, semis, capital goods, and credit cards.  The US bank season is nearly over and numbers were pretty healthy, esp. relative to reduced expectations.  Loan growth wasn’t as bad as the weekly Fed data suggested, NII/NIM was inline-to-better, expenses and credit remain under control (there were some pockets of credit deterioration but nothing that suggests a broader systemic problem), and trading was healthy (the one notable exception was GS which badly lagged its peers in FICC; GS mgmt. didn’t sound concerned and cited the latter two letters, i.e. currencies and commodities, for the shortfall).  At the moment for bank stocks the direction of TSY yields (and the shape of the curve) is having a greater influence than earnings.  In semis only a handful of companies reported but the early results are solid, esp. semi equipment (ASML and LRCX).  MXIM’s report Thurs night was more controversial – the headline income statement figures were solid for Mar actuals and June guide but mgmt. on the call acknowledged some softness in the US auto market (although MXIM really wasn’t outright negative on autos and while SAAR is drifting lower the amount of silicon per unit continues to experience strong growth).  The initial indications from the capital goods companies w/DOV, GE, and HON all posting healthy organic growth (both revs and orders) while Eurozone reports were decent too (Schneider, ABB, etc.).  GE was controversial as very strong orders and income statement numbers were offset by very weak cash flow.  GWW was the one notable disappointment within the industrial space although the problem was competition/pricing (and not necessarily end-market demand).  The best sector for assessing the health of “the consumer” isn’t retail but instead the credit cards (the key is the amount of card swipes, not where those swipes are occurring) and numbers out of that group so far in CQ1 have been positive (w/upside reports out of AXP and V/Visa).  Other earnings highlights over the last week include CSX (solid Q and Hunter Harrison provided positive guidance), IBM (pretty weak all around w/soft revs and margin downside), EBAY (decent Q1 but weaker Q2 guide), NFLX (some noise w/Q1 subs light and better Q2 guide but the H1 numbers in aggregate were about inline), and VZ (the big focus was the very weak subscriber metrics; the sub results would have been even worse had VZ not unveiled its unlimited data plans in the middle of the Q).

* * *

Finally, a focus just on US events in the coming week, together with consensus and Goldman estimates

Monday, April 24

• 10:30 AM Dallas Fed manufacturing index, April (consensus +17.0, last +16.9)


• 11:30 AM Minneapolis Fed President Kashkari (FOMC voter) speaks: Minneapolis Federal Reserve President Neel Kashkari will give the keynote speech at the 6th Annual Fink Investing Conference at UCLA in California. Audience Q&A is expected.


• 03:15 PM Minneapolis Fed President Neel Kashkari (FOMC voter) speaks: Minneapolis Federal Reserve President Neel Kashkari will participate in a moderated discussion at Claremont McKenna College in Claremont. Audience Q&A is expected.

Tuesday, April 25

• 09:00 AM S&P/Case-Shiller 20-city home price index, February (GS +1.1%, consensus +0.7%, last +0.9%): We expect the S&P/Case-Shiller 20-city home price index to rise 1.1% in the February report following a 0.9% increase in the prior month. The measure still appears to be influenced by seasonal adjustment challenges, and we place more weight on the year-over-year increase, which rose to 5.7% from 5.5% in January.


• 09:00 AM FHFA house price index, February (consensus +0.4%, last flat): Consensus expects the FHFA house price index to rise 0.4% (mom sa) in February, after a flat reading in January. The FHFA house price index has a wider geographic coverage than the S&P/Case-Shiller home price index, but is based only on properties financed with conforming mortgages. On a year-over-year basis, FHFA home prices rose 5.7% in January, down from 6.2% in December.


• 10:00 AM New home sales, March (GS -2.0%, consensus -1.4%, last +6.1%): We expect new home sales to fall 2.0% in March, retracing some of its 6.1% February increase, as we expect the negative impact of Winter Storm Stella in the Midwest and Northeast to be partially offset by a favorable fundamental backdrop and an elevated level of single-family building permits.


• 10:00 AM Conference Board consumer confidence, April (GS 121.0, consensus 123.0, last 125.6): We forecast that consumer confidence declined 4.6pt to 121.0 in April from the cycle high in March. Our forecast reflects some sequential deterioration in consumer surveys in late March and early April, as well as recent stock market weakness.


• 10:00 AM Richmond Fed manufacturing index, March (consensus +16, last +22)

Wednesday, April 26

• There are no major data releases.

Thursday, April 27

• 08:30 AM U.S. Census Bureau Advance Economic Indicators Report: Advance goods trade balance, March preliminary (GS -$65.9bn, consensus -$65.4bn, last -$63.9bn); We estimate the goods trade deficit widened $2.0bn to $65.9bn in March, following February’s sharp narrowing that we believe reflected a pronounced impact from the relatively early Chinese New Year, which likely shifted the timing of imports from February to January. Based on our expectation of a partial reversal of these effects as well as a (likely related) sharp rebound in March inbound container traffic, we expect renewed deterioration in the trade balance. At the same time, lower March oil prices should reduce the nominal petroleum deficit, providing a partial offset.


• 08:30 AM Wholesale inventories, March preliminary (consensus +0.3%, last +0.4%); 08:30 AM Durable goods orders, March preliminary (GS +2.1%, consensus +1.3%, last +1.8%) ; Durable goods orders ex-transportation, March preliminary (GS +0.4%, consensus +0.4%, last +0.5%); Core capital goods orders, March preliminary (GS +0.5%, consensus +0.5%, last -0.1%); Core capital goods shipments, March preliminary (GS -0.1%, consensus +0.2%, last +1.0%): We estimate durable goods orders rose 2.1% in March, driven by higher non-defense aircraft orders indicated by stronger company-reported data. We believe the details of the report are likely to be mixed. Manufacturing production was soft in March, exhibiting a 0.2% pullback in ex-auto manufacturing and a 0.4% drop in the capex-sensitive business equipment category. Chinese New Year effects may also weigh on core capital goods shipments growth, to the extent that they boosted the February level. At the same time, capital goods company results and commentary have been encouraging, with mounting evidence of accelerating growth in the industrial economy. Accordingly, we estimate softer shipments, but firmer orders in March, with month-to-month growth rates of -0.1% and +0.5%, respectively. We estimate durable goods orders ex-transportation rose 0.4%.


• 08:30 AM Initial jobless claims, week ended April 22 (GS 245k, consensus 243k, last 244k); Continuing jobless claims, week ended April 15 (consensus 2,010k, last 1,979k): We estimate initial jobless claims edged up 1k to 245k. Claims have returned to normal levels following two weeks of temporary elevation in mid-to-late March that likely reflected the impact of Winter Storm Stella. Continuing claims – the number of persons receiving benefits through standard programs – have continued to trend down in recent months, suggestive of additional labor market improvement that we expect to continue.


• 10:00 AM Pending home sales, March (GS +0.5%, consensus -1.0%, last +5.5%): Regional housing data released so far suggest the improvement in February contract signings continued into March, despite unseasonably cold temperatures and above-average snowfall. We expect a 0.5% increase in the pending homes sales index, adding to the 5.5% increase in the prior month. Stable-to-higher March pending homes sales would be particularly encouraging in the context of higher mortgage rates, which incidentally have declined so far in April after reaching a two-year high in mid-March. We have found pending home sales to be a useful leading indicator of existing home sales with a one- to two-month lag.


• 11:00 AM Kansas City Fed manufacturing index, April (consensus +16, last +20)

Friday, April 28

• 08:30 AM GDP (advance), Q1 (GS +1.4%, consensus +1.1%, last +2.1%); Personal consumption, Q4 (GS +1.3%, consensus +0.9%, last +3.5%): We expect a +1.4% increase in the first vintage of Q1 GDP (qoq saar), driven by a double-digit increase in residential investment (+12.6%) and a robust pace of growth in business fixed investment (+6.9%), partially offset by a negative growth contribution from inventory investment (-0.7pp) and net exports (-0.1pp). Accordingly, our growth estimate for the domestic final sales component is somewhat firmer at +2.1%. We look for real personal consumption to rise 1.3%, aided by a late-quarter boost to utilities consumption that reflects the impact of unseasonably cold weather in March.


• 08:30 AM Employment cost index, Q1 (GS +0.7%, consensus +0.6%, last +0.5%); We estimate that growth in the Employment Cost Index (ECI) accelerated to 0.7% in Q1 (qoq sa) from 0.5% in Q4, with the year-over-year pace rising to 2.3% (from 2.2%). Our forecast mainly reflects firming wage growth in an economy at or near full employment. The ECI rose a softer-than-expected 0.5% in the fourth quarter, and the headline measure appears to have overshot to the downside relative to underlying wage growth in the ECI sample. Wages and salaries excluding incentive-paid occupations actually firmed last quarter, rising 2.5% year over year vs. 2.4% in Q3. This suggests some scope for the gap to close (or overshoot in the other direction) in Q1. Relatedly, we see scope for improving wage growth in sales and related occupations and in the administrative and support services industries, where wages and salaries exhibited rare outright declines last quarter.  Wage growth data has generally been stable-to-higher so far in 2017, most notably the Atlanta Fed wage tracker, which rose to 3.4% year over year in March. Our broader Q1 wage tracker rose 2.9% year over year in Q1, up from 2.8% in Q4 and compared to the Q4 ECI of +2.2% (yoy). Taken together, our base case expectation is that growth in the Employment Cost Index will round up to +0.7%.


• 09:45 AM Chicago PMI, April (GS 57.0, consensus 56.5, last 57.7): We expect the Chicago PMI to decrease to 57.0 in April after the index edged up to 57.7 in March. Despite expected sequential softness, the index is likely to remain at a level consistent with growth in the manufacturing sector, in line with the reports of other regional manufacturing surveys in April.


• 10:00 AM University of Michigan consumer sentiment, April final (GS 97.5, consensus 98.0, last 98.0): We expect the University of Michigan consumer sentiment index to pull back 0.5pt to 97.5 in the April final estimate, reflecting some sequential deterioration in April consumer surveys. The preliminary report’s measure of 5- to 10-year ahead inflation expectations was unchanged at 2.4%. With gas prices rebounding in April, the related technical drag on reported inflation expectations should be limited.


• 01:15 PM Fed Governor Brainard (FOMC voter) speaks: Federal Reserve Governor Lael Brainard will give a speech on “Fintech and the Future of Finance” at the Kellogg School of Management at Northwestern University in Illinois. Audience Q&A is expected.


• 02:30 Philadelphia Fed President Harker (FOMC voter) speaks: Philadelphia Federal Reserve President Patrick Harker will give a speech on “How STEM Can Get You Anywhere” at the X-STEM Symposium in Washington D.C. Audience Q&A is expected.

Source: JPM, Goldman, SocGen

These Are The Best And Worst U.S. Cities To Own A House

In its latest, January, update of US home prices, Case-Shiller reported that the unadjusted 20 city composite index, rose at a 5.9% annual rate, up from 5.7% last month and setting a 31-month high. Perhaps even more notable is that in 17 of 20 metro areas, the pace of home appreciation over the past year was 5% or higher, or more than double the pace of core inflation. And with rents continuing to soar across the country, in many cases at a double digit clip, not to mention exploding healthcare costs, one wonders just what the BLS "measures" with its monthly CPI update.

In any case, for those lucky Americans who can afford to own a house instead of being stuck renting the New Normal American dream where they are prohibited from peddling fiction as their annual rent increases by 10% or more each year, here is the breakdown of the best and worst cities for home price appreciation in the U.S.

At the top, with annual price increases of 10% or more, we find the usual west coast (and thus closest to China) suspects: Seattle and Portland, followed close behind by Denver and Dallas, which appears to be enjoying the recent revival in shale. What is more surprising is that on the other end we find Cleveland, Washington and - of all places - New York, which was dead last with only 3.2% annual price appreciation.

Here are some more observations from Case Shiller on the top 3 cities:  Seattle, Portland, and Denver reported the highest year-over-year gains among the 20 cities over each of the last 12 months. In January, Seattle led the way with an 11.3% year-over-year price increase, followed by Portland with 9.7%, and Denver with a 9.2% increase. Twelve cities reported greater price increases in the year ending January 2017 versus the year ending December 2016. 

The below charts compare year-over-year returns for Seattle and Portland with different ranges of housing prices (tiers). Tier level analysis from 2011 to present for both Seattle and Portland’s year-over-year returns show housing prices in the high tier to be the most stable, while housing prices in the low tier are the most volatile

The Week's Key Economic And Financial Events

In this holiday-shortened week, attention will be on the US FOMC minutes, housing data and consumer confidence. There will be GDP, PMI and inflation releases across the Euro Area as well as the latest Greek Eurogroup meeting. Look for GDP and public finances data in the UK. In emerging markets, there are monetary policy meetings in Brazil, Colombia, Korea and Kazakhstan.

Watch Fed minutes for more clarity on March FOMC

The minutes of the February 1st FOMC meeting are likely to reveal that Fed officials have become increasingly constructive on the outlook for the economy. There will likely be a mention of the meaningful improvement in business and consumer sentiment surveys. The FOMC is also expected to note that the labor market is likely close to full employment and that signs of underutilization have diminished. Finally, there could be some mentions of concern over "external" developments. Any discussion about the Fed"s balance sheet should also garner interest: recent comments from Fed officials suggest there being an increasing debate about the future of the Fed"s balance sheet.

Eurogroup meets on Greek economic adjustment program

Grexit is back, though as a tail risk. If all three sides insist on their red lines, the logical outcome would be Grexit. While this would likely not be in the political interest of either Greece or the creditors, markets could become nervous as we approach the July maturities (€6bn excluding bills). There is also a high risk of a snap election which initially could be market negative, but ultimately lead to a more stable government.

The week ahead in Emerging Markets

There will be monetary policy meetings in Brazil, Colombia, Korea and Kazakhstan. Brazil’s BCB is expected to cut the Selic rate by 75bp.

In other data

• In the US, focus is largely on the Feb FOMC Minutes. Also due are home sales data along with a wide range of Fed speakers currently on schedule.


• In the Eurozone, meaningful releases include consumer confidence and PMIs.


• In the UK, data about public sector finances and GDP is on deck.


• In Japan, the main data releases include trade balance and PMIs


• In Australia, we get RBA minutes for February along with wage price index and construction data. Nothing major due from New Zealand.

A daily breakdown of key events from Deutsche Bank:

To this week’s calendar now. With the US on holiday for President’s Day (and markets subsequently closed) the data this morning is reserved for Europe where we’ll get PPI in Germany and CBI selling prices data in the UK. Euro area consumer confidence data will also be released.

Kicking things off on Tuesday will be Japan where we get the flash February manufacturing PMI. It’ll be all about the PMI’s in the European session too with flash manufacturing, services and composite readings all due. We’ll also get CPI in France and public sector net borrowing data in the UK. In the US we’ll also get the three flash PMI readings.

In the Asia session on Wednesday the lone data release is property prices data in China. Over in Germany we’ve got the IFO survey results for February as well as preliminary Q4 GDP for the UK, along with the various growth components. The final January CPI figures for the Euro area will also be watched. In the US on Wednesday the lone data is January existing home sales, while we’ll also get the FOMC minutes from the January meeting.

Thursday kicks off with more GDP data, this time the final January report in Germany while we’ll also get confidence indicators out of France. In the US data due includes initial jobless claims, FHFA house price index and Kansas City Fed’s manufacturing survey.

There’s nothing of note in Europe on Friday while in the US we’ll get new home sales and the University of Michigan consumer sentiment reading.

Away from the data the Fedspeak this week consists of Kashkari, Harker and Williams on Tuesday, Powell on Wednesday and Lockhart on Thursday. Another focus for markets will be today’s Eurogroup meeting where finance ministers are due to discuss Greece’s bailout situation. Also of note today is the House of Lords commencing a two-day debate on the draft law passed in the House of Commons with a vote due on Tuesday. BoE Governor Carney is also due to testify before UK Parliament on Tuesday.

A tabular summary of key events courtesy of SocGen

Finally, here is commentary from Goldman of all key US events, together with consensus estimates:

Monday, February 20

• President"s Day. US markets are closed.

Tuesday, February 21

• 08:50 AM Minneapolis Fed President Kashkari (FOMC voter) speaks:Minneapolis Fed President Neel Kashkari will give a speech on the US economy and the role of the Federal Reserve to the Financial Planning Association of Minnesota in Golden Valley, Minnesota. Audience Q&A is expected.


• 09:45 AM Markit Flash US Manufacturing PMI, February preliminary (consensus 55.2, last 55.0)


• 09:45 AM Markit Flash US Services PMI, February preliminary (consensus 55.8, last 55.6)


• 12:00 PM Philadelphia Fed President Harker (FOMC voter) speaks: Philadelphia Fed President Patrick Harker will give a speech on the economic outlook at the Wharton School of the University of Pennsylvania. Audience and media Q&A is expected.


• 03:30 PM San Francisco Fed President Williams (FOMC non-voter) speaks: San Francisco Fed President John Williams will give a presentation on economics to students at Boise State University.

Wednesday, February 22

• 10:00 AM Existing home sales, January (GS +2.0%, consensus +0.9%, last -2.8%): We look for a 2.0% rebound in January existing homes sales, following last month’s 2.8% decline. Regional housing data released so far suggest sequential improvement in closed homes sales, consistent with the 1.6% rise in December pending homes sales (which represent contract signings). Existing homes sales annual revisions are also scheduled to be released. Existing home sales are an input into the brokers" commissions component of residential investment in the GDP report.


• 01:00 PM Fed Governor Powell (FOMC voter) speaks: Federal Reserve Governor Jerome Powell will give a speech on the economic outlook and monetary policy at the Forecaster’s Club of New York’s luncheon at the Cornell Club in New York. Audience Q&A is expected.


• 02:00 PM FOMC Minutes from the January 31-February 1 meeting: The FOMC kept policy rates unchanged at its January meeting and made few revisions to its statement, which described the economy as expanding “at a moderate pace” and characterized job growth as “solid.” In the minutes, we will look for any hints about the timing of the next hike as well as any comments about the FOMC’s evolving expectations for fiscal policy under the new administration.

Thursday, February 23

• 08:30 AM Initial jobless claims, week ended February 18 (GS 240k, consensus 241k, last 239k); Continuing jobless claims, week ended February 11 (consensus 2,065k, last 2,076k): We expect initial jobless claims to edge up by 1k to 240k. The ongoing improvement in jobless claims provides additional evidence of underlying improvement in the pace of layoffs, and we also note the year-to-date improvement in several energy-producing states. Accordingly, we expect the pace of layoffs to remain low.


• 09:00 AM FHFA house price index, December (last +0.5%): The FHFA house price index has a wider geographic coverage than the S&P/Case-Shiller home price index, but is based only on properties financed with conforming mortgages. On a year-over-year basis, FHFA home prices rose at a 6.1% pace in November.


• 11:00 AM Kansas City Fed manufacturing index, February (last +9)

Friday, February 24

• 08:35 AM Atlanta Fed President Lockhart (FOMC non-voter) speaks: Atlanta Federal President Dennis Lockhart will speak on his tenure at the Fed during the bank’s 2017 Banking Outlook Conference. President Lockhart will be officially leaving his post on February 28.


• 10:00 AM New home sales, January (GS +9.5%, consensus +6.5%, last -10.4%): We expect new home sales to rebound 9.5% in January, mostly reversing a 10.4% drop last month that we believe was partially driven by unseasonably high snowfall in the Midwest. We expect a favorable fundamental backdrop and the elevated level of single-family building permits to mitigate the negative impact of higher mortgage rates on new homes sales activity.


• 10:00 AM University of Michigan consumer sentiment, February final (GS 96.2, consensus 96.0, last 95.7): We expect the University of Michigan consumer sentiment index to rebound 0.5pt to 96.2 in the February final estimate, reflecting improvement among more timely measures of consumer confidence as well as the favorable stock market performance over the last two weeks. The University of Michigan’s survey of 5- to 10-year ahead inflation expectations fell 0.1pp to 2.5% in the preliminary February reading but remains above the record low of 2.3% in December. We expect this measure to remain stable or edge up in the final reading.

Source: BofA, DB, SocGen, GS

"Things Have Become Quite Precarious"

Submitted by MN Gordon via EconomicPrism.com,

The popular economic theme being reported by the popular press still remains.  That the economy is grinding higher.  That growth is improving, albeit slowly.  That blue skies are just over the horizon.

Naturally we have some misgivings.  As far as we can tell, business is not humming along.  Earnings are stagnant.  Profits are slim.  Moreover, corporate reductions in force (RIFs) are being executed with the imprecise targeting of a sledge hammer.  Even Google’s laying off staff.

Most notably, if the economy were improving there’d be demand for raw materials and new construction equipment to fabricate it into stuff.  This doesn’t appear to be the case at the moment.

Earlier this week, for example, Caterpillar CEO Doug Oberhelman remarked that, “Economic weakness throughout much of the world persists and, as a result, most of our [Caterpillar’s] end markets remain challenged.  In North America, the market has an abundance of used construction equipment, rail customers have a substantial number of idle locomotives, and around the world there are a significant number of idle mining trucks.”

Oberhelman’s comments were delivered as part of Caterpillar’s third quarter earnings report.  What’s more, he wasn’t too optimistic about the coming year either.  “We remain cautious as we look ahead to 2017.”

Structural Deficiencies

Perhaps Oberhelman is being overly guarded.  But given his company’s core market of providing equipment for mining and construction he gets a unique window into the demand for materials and construction.  By Oberhelman’s account, global demand is poor.  What to make of it?

The explosion of debt coupled with policies of mass money debasement over the last 40 years has relentlessly borrowed demand from the future.  Tomorrow’s demand was already attained yesterday.  Thus, in place of today’s demand, is an abundance of slack.

In other words, the world has been pushed well past the effectiveness of such policies.  Stimulating new demand with new debt no longer results in new growth.

Even negative interest rates have failed to give the economy much of a boost.  As far as we can tell, capacity has so far outpaced demand that a recession is needed to bring things back into alignment.

Alas, efforts to combat the Great Recession did not solve the economy’s structural deficiencies.  They merely suspended the recession.  What’s more, in doing so, they set us up for something even greater…like a depression.

By our estimation, things have become quite precarious.  The U.S. stock market, as measured by the S&P 500, is nearing its all-time highs.  So, too, U.S. housing, as measured by the Case-Shiller Index, is just 0.1 percent below its record high set in July 2006.  At the same time, over the last eight years, the national debt has nearly doubled to $19.7 trillion.

Yet even with all this new government debt and inflated asset prices, GDP slumps over like a weighty sack of potatoes.  The cost of greater and greater issuances of debt now far outweighs any benefit.  Nonetheless, the Federal Reserve intends to keep juicing the credit market.

Here’s why…

Meddling with Markets for Work and for Pleasure

Fed Chair Janet Yellen’s primary liability is not her bowl haircut.  To the contrary, that’s her primary asset.  Rather, her primary liability is her 40 year career yanking the chains of credit to her liking.

Unfortunately, Yellen’s long run of employment has had the ill effect of making her believe she’s somehow good at her job.  But how does she really know if she’s any good?

If government statistics say unemployment’s 5 percent, inflation’s 2 percent, and GDP’s 3 percent does that mean she’s doing a good job?  Or does it mean the propaganda mill still supports her?  Certainly, any accomplishments she can point to are all based on fluff.

To be clear, Fed Chair Janet Yellen has been meddling with credit markets – and by extension the economy – since Moby Dick was a minnow.  That’s a long time to be doing something that, in effect, is so broadly destructive of wealth.

Undeniably, Yellen’s main accomplishment is that she primes the pump for Wall Street and the big banks so they can siphon off the accrued livelihood of the hoi polloi.  All the while she mucks around with the lives of hundreds of millions of people in ways that only the most ardent of central planners could find pleasure slobbering over.