Posts filed under “Fixed Income/Interest Rates”
What Would Greenspan Do?
That’s the question the WSJ’s Greg Ip asks:
"Should the Fed worry more about rising inflation and raise rates further, risking a recession? Or should it worry more about growth and hold rates steady, risking higher inflation and a loss of credibility? The outlook for global stock and bond markets will hinge on the outcome of that decision."
As if we don’t know WWGD: The short answer is, he would flood the system with liquidity. The longer answer involves opaque speechifying about systemic risks and global resilience and blah blah blah, as he released the hounds of M3 into the ether. (more money supply! Faster! Faster!)
The column references an academic study co-authored by Bernanke that concluded "economic growth begins to slow roughly six months after the Fed
tightens monetary policy. But inflation doesn’t begin to ease until
about year has passed."
The net result of this is the conundrum we referred to last week, with the Fed painted into a corner.
Here’s an excerpt from Ip’s column:
"The result often is an uncomfortable period when growth is slowing, inflation rising and the central bank facing a tough choice between higher rates and watchful waiting.
That may be where the U.S. economy is now. After a first-quarter surge, growth is slowing, as higher interest rates and energy prices take their toll on housing and consumer spending. It "seems pretty clear that the housing market is cooling," Mr. Bernanke said Thursday, though the slowdown is quite "orderly and moderate." But core inflation, which excludes food and energy, reached a one-year high of 2.3% in April.
Markets have gyrated on the economic crosscurrents and bond yields reflect a rising concern about whether Mr. Bernanke will hold inflation low over the long term. "With core inflation crawling up, a new central-bank chairman is clearly not going to want to let inflation expectations go up," Mr. Gertler said.
With the Fed having raised its short-term interest-rate target in 16 quarter-percentage-point steps to 5% since June 2004, some at the central bank appear to favor pausing soon to assess the impact of those moves on the economy."
Today’s futures look like hell (glad I got stopped out of longs last week). If we see a serious whackage today — and it sure looks like we might — that will resurrect the possibility of a pause in June.
Here is everyone’s favorite faulty comparison: 1994 vs 2000 vs 2005
click for larger graphic
As previously noted, the better comparo is 1973.
Trade safe today — it looks like it could get ugly out there.
What Would Greenspan Do? Bernanke Weighs
Risks of Rate Increases and Rising Inflation
WSJ, May 22, 2006; Page A2
Sales of existing homes surprised to the upside yesterday. But one data point does not make a trend. This is the first rise (sequential monthly change) after 5 straight months of falling Home Sales. And that’s before we examine the data.
Before you declare the end of the housing slow down, consider:
- Existing Home sales actually slipped vs. last year by -0.7%; The reported gain was over last month’s data;
- the Inventory of unsold homes soared 7 percent in March, hittting an all-time record; There are now 3.19 million existing homes for sale, or 5.5 months’ supply; That’s the largest inventory since July 1998
- Existing homes edged up 0.3% last month to a seasonally adjusted annual rate of
6.92 million units; (we know that seasonally adjusted data is not always accurate)
- Year over year, the Northeast and Midwest gained, while the previously hot housing markets in the South and the West slipped;
- median home prices are still rising, albeit nmore slowly — up 7.4% year over year, to $218,000.
Here’s a data point that has me scratching my head: Why are there different numbers for the year-over-year changes for seasonally and not seasonally adjusted? Was this March somehow in a different season than last year’s March? I am perplexed.
Note that data for existing home sales comes from National Association of Realtors, a group that is certainly an interested party; Of course, as a homeowner, investor, and someone with a public bearish tilt for the second half, I’m hardly objective myself (hey, I try). But this oddity — down -0.5% for the not seasonally adjusted year over year versus down -0.7% for the seasonally adjusted year over year — is beyond my comprehension.
So much for the hard data on existing sales; Today, we get New Home Sales. Recall our prior admonishments that monthly New Home Sales Data are unreliable; look instead to a moving average.
Let’s move onto some anecdotal evidence. A friend writes:
"Flop! Wow, KB running blue light specials in California. Not surprising,
Chico area was rated one of the most overvalued markets in the country. Houses
in the $200k space. When was the last time you saw that in California? "
Here’s the sales pitch:
"Oak Knoll Place in Live Oak is located in a beautiful
community near the majestic Sutter Buttes. With easy access to Highway 99, it is
ideally located for easy access to Sacramento, Lake Tahoe, Reno and a wide
variety of recreational opportunities. Yuba City and Marysville are
approximately 10 minutes south, Chico is approximately 35 miles north and the
Gray Lodge Wildlife area is approximately 10 minutes west. Live Oak has a
quaint, small-town atmosphere with many nearby recreational water activities,
including the Feather River, Yuba River and Sacramento River. Prices starting
from the High $200′s."
I don’t know Live Oak, but houses like that in California are hard to imgaine . . .
More after the jump.
Existing-Home Sales Rise Again in March
NATIONAL ASSOCIATION OF REALTORS
WASHINGTON (April 25, 2006)
Existing Home Sales data
NATIONAL ASSOCIATION OF REALTORS