This is across the pond, where the there has been a £1.15 billion default on bonds for 9 office buildings in downtown London.
The value of the properties has declined 50% from peak.
We will see a lot more of this in commercial real estate, particularly since most of the loans are relatively short term, typically about 5 years, and the note will come due, and there will be no opportunity to refinance, because the value of the property has fallen.
H/t Calculated Risk
It’s a pretty slow day, at least until the FDIC gets into the act this evening.
In any case Treasuries are up up slightly, which means that yields are down, which removes a potential upward pressure on interest rates.
BTW, when one refers to debt instruments issued by the US Department of the Treasury, are they “Treasuries”, or “Treasurys”? I’m not sure.
In the meantime, the idea that the consumer may be engaging in a longer term is bolstered by statements by the CEO Coldwell Banker, who notes that, “The more important ‘move-up’ buyers were absent,” from the market.
People are paying down debt in a big way, as opposed to up-sizing.
All we have left is currency and energy, and the dollar continued to weaken as investors looked more towards return and less toward safety, while both crude oil and wholesale gasoline fell sharply on reports of inventory growth.
Don’t expect to see this at the pump for a while, the AAA reports that retail gasoline was up again, which makes it the 51st day since it’s fallen.
Well, I’ve missed a point on jobless claim numbers, which came out today, and showed increasing initial jobless claims, from 605,000 to 608,000, still into what Atrios calls “holy crap” territory, but that continuing claims fell from 6.74 million to 6.69 million.
I generally find continuing claims to be a better metric, but, as Susie Madrak notes, continuing claims do not count people whose benefits have been exhausted.
I’m not sure how to account for this in the data, but it is a factor.
On the other hand, we do have some unequivocally good news in the April vehicle miles driven statistics from the DOT for the first time in 20 months, which could be an indicator of a recovery, though gas prices nationally are about a buck cheaper, which may also be goosing the driving numbers.
We also have the index of leading economic indicators rising, a good sign, though the Philadelphia Fed’s Business Outlook Survey improved significantly, though it still shows contraction, so it’s an positive 2nd derivative.
It also looks like yesterday’s report of declining mortgage bond yields did predict today’s report of falling mortgage rates, with the 30 year fixed rate dropping 21 basis points (0.21%) to 5.38%, which should relieve some of the pressure on housing.
Still, with Midtown Manhattan office rents falling, down 28% year over year (!), the other show in real estate, the commercial side, is clearly dropping.
A note on the recent rise in interest rates, the real yield (interest -inflation) on 10 year treasuries is at a 15 year high, over 5%, which indicates that that inflation fears might be overblown.
The energy and currency markets have viewed today’s news as generally positive though, with oil rising, though Nigerian unrest contributed to this, and the dollar falling.
So, we have the inflation numbers for May, and the CPI was up 0.1% over April, and down 1.3% year over year, the biggest price decline since April, 1950.
The deflation would have been worse, but for the ramp up in retail gasoline prices, which continues on its tear, with prices having risen for 50 straight days.
In the mean time, banking is getting interesting, with S&P cutting ratings on 18 major banks, including Wells Fargo, Capital One, BB&T.
Additionally, you have credit default swaps (CDS) have shown their largest 3 day in over 3 months, which indicates that there is a belief that the risks of default on corporate bonds is getting worse.
The fact that treasuries have staged a mini-rally, with prices up and yields down, is either a measure of concern about corporate bonds, or relief about the low inflation numbers, I’m not sure which.
Real estate is full of mixed signals. Mortgage applications fell to a 7 month low, largely on the relatively high interest rates, but mortgage bond yields have been falling for a week, which would point toward lower rates in the future.
The low inflation is perceived, to be a good marker for recovery, which pushed the dollar down, because of less demand for the $US safe haven.
Oil is getting just plain flaky. It finished the day up, to $71.03/bbl, though it dropped like a stone earlier in the day following news that gasoline stockpiles rose by 3.4 million bbl this week.
I’m not certain where oil is going, but the recent volatility seems to indicate that it is going somewhere in the near term, probably up.
It’s a day for mixed economic news, with credit card defaults rise hitting a record in May, which obviously bodes ill for consumer spending
On less personal metrics, Los Angeles and Long Beach port traffic was up over April, though it was still down year over year, and housing starts and housing permits jumped though much of this activity may simply be builders trying to beat the $8000 first time home buyer tax credit before it expires at the end of November.
Additionally, it looks like the financial markets are moving toward some instability, as the VIX, an index of market volatility, has moved above 30, which indicates a bumpy ride, and possibly a correction, in the markets.
Inflation is muted on both sides of the Atlantic, with last with wholesale prices inflation hitting only 0.2% in May, and inflation in the Euro Zone posting a 0% rate.
Meanwhile, continued comments by Russia about moving to an alternative reserve currency to the dollar pushed the dollar down, and that, along with the housing numbers, drove crude oil up for most of the day, though it settled down $0.15/bbl, basically treading water.
[late update]
US industrial output fell 1.1% in May, and the capacity utilization rate fell to 68.3%, the lowest number since records started being kept in 1967.
Well, if you are looking for “green shoots”, the New York Fed Empire State Manufacturing Survey is not one of them, they got worse (see picture).
Additionally, the NAHB Builder Confidence fell a bit in June, from 16 to 15, with 50 being neutral, so that remains awful.
When one considers that delinquencies on commercial mortgage backed securities broke 2%, this is a state of mind that accurately reflects the reality out there.
Still, another measure of consumer confidence, this one from the University of Michigan, , which is marginally better, but still well below the 10 year average of 88.2.
We also have two relatively well known business have filed for bankruptcy reorganization, Six Flags amusement parks and the Extended Stay hotel chain.
Meanwhile, in Ireland, deflation has hit an annual rate of -4.7%, which is not surprising. There are a lot fewer dollars (Euros) chasing goods there, now that their bubble has popped.
Still, it appears that foreign investors are more confident about the future on a global level, as they have cut back on purchases of long term US securities, as the flight to safety slowed/reversed.
Meanwhile, we are starting to see some inflation from the recovery in oil prices, with import prices rising 1.3%, largely on oil, though they are down by 17.6% (!) year over year.
This has driven the price of retail gasoline up again, and are now up 63% for the year, though crude oil fell today.
The dollar was up, largely on statements by Russia that it should remain the world’s reserve currency.
We had the latest jobless report come out, and it’s another mixed bag, with the initial claims falling by 24K to 601,000, and the 4 week moving average fell to 621,750, but continuing claims rose again to another record, 6.82 million.
We also have mixed news on retail sales, with a ½% increase month over month, but a 10.8% decrease year over year, and a lot of the increase was driven by more expensive retail gasoline, which, by the way, was up again today, to $2.632/gal.
And real estate is not looking good, with foreclosures hitting the 3rd highest on record, and
mortgage rates rising sharply, to nearly 6%.
Additionally we have, despite the recent stock rally, Americans’ wealth falling $1.3 so far in 2009.
Additionally, international trade is still in the doldrums, with China’s exports in may down 26.4% year over year.
On the brighter side, Treasury yields fell, indicating that the upward pressure on interest rates may be abating.
In any case, it looks like oil will continue heading up, a prices closing at $72.68/bbl, though it was above $73 earlier in the day, largely on the IEA’s upwardly revised estimates of world demand.
In currency, the dollar fells on what were seen to be positive jobs and sales data, which reduced safe-haven demand.
Today, we get the unemployment rate (U3). It rose from 8.9% to 9.4%, a ½% rise.
Ouch.
By way of context, you can look at the BLS alternate measures table, and U6, which is probably closest to the figures used during the depression, though it still under counts relative to the older metric, rose from 15.8% to 16.4%.
Ugly number.
Of course, the press is reporting that the decrease in non-farm payrolls was less than expected, -345,000 as opposed to their projection of something in the -500K range.
Additionally, part of the increase in unemployment is workers becoming undiscouraged and actively looking for work, though the U6 number indicates that there was still an upward revision despite that.
Still, it appears that bondholders are betting on a recovery, they are bidding up the rates on treasuries, which is also driving up mortgage rates.
There is an argument between economists as to whether this is inflation concerns, or whether people have simply stopped fleeing headlong to the safety of US Government securities.
I’m with the latter school, but you can decide for yourselves.
As to where the economy is headed, I’d bet with the insiders and banks and such, and
insider sales as reported to the SEC are going up, implying that they are expecting worse for their firms.
Still, the jobs report drove both the dollar and oil up today.
The Securities and Exchange Comission has charged the former CEO of Countrywide Mortgage, Angelo Mozilo, with securities fraud for insider trading.
Basically, he, former COO, David Sambol, and former CFO, Eric Sieracki, are accused of misleading investors about how crappy their lending standards were until they dumped their own stock.
This is not a criminal proceeding, but one hopes that it moves to that.
We have good news on the jobs front, with both new and continuing claims claims falling this week.
Continuing claims fell by 15K to 6,740,000, the first time that they have fallen since January 3.
We also have the rather Dickensian named Challenger Gray & Christmas reporting that corporate layoff plans fell in May.
Meanwhile, the consumer economy continues in the doldrums, with MasterCard announcing that consumer spending continues to fall, though not as quickly as earlier in the year, and the retail chain’s monthly sales reports missing expectations, though the 800 pound evil gorilla in the room, Wal Mart, has stopped reporting monthly sales figures.
Mortgage rates are continuing their climb, with the rate for a 30 year fixed mortgage hitting a 6 month high.
On the other side of the pond, both the European Central Bank and the Bank of England left their benchmark rates unchanged, which drove the dollar down, because there had been some expectation of a rate cut priced in.
Meanwhile, in energy, Goldman-Sachs predicted higher oil prices later this year, which, along with the employment data, pushed the price of oil up.
Timothy Geithner bought his home in Westchester County, New York for $1.650 million 5 years ago, and now cannot sell it for $1.575, so he is looking for a renter, at about $7,500 a month, which figures out to be about 80% of his mortgage and taxes.
Of course, I could be wrong, and it could be that Mr. Geithner is figuring on leaving Washington, DC sooner rather than later, and does not want to sell the house under those circumstances.
Certainly, if I were in his shoes, I might be concerned that my DC sojourn would be peripatetic.
Well, the ADP payroll estimate is out, and they are estimating a drop of 532,000 in non-farm payrolls, which is better than last month, but is still in major league suckage territory.
The Institute for Supply Management’s index of non-manufacturing businesses is in the same boat, which covers the services sector, is still declining, but not quite as badly.
So, things are getting worse less quickly, not getting better.
Meanwhile in the junction of banking and real estate, S&P has downgraded 59 prime Residential Mortgage Backed Securities (RMBS) to D, which, according to the Wiki, means, “Bankruptcy or lasting inability to make payments most likely.”
With all this going on in mortgages, it is not surprising that we are seeing higher rates and fewer mortgage applications.
Well, at least we are not in Latvia, whose government was unable to sell debt today….That’s right, we aren’t talking about paying more interest than anticipated, no one would buy their debt.
Mean while, the news of reduced demand and a surge in inventory drove oil down, while the dismal economic news drove the dollar higher, as investor looked for safe havens.
My guess is that the trend in the dollar is down, and it will be firmly ensconced somewhere weaker than $1.50:€1.00 by year’s end
Option ARMS, NegAm, and other forms or risky, exotic loans are making a comeback as 30 year fixed loan rates.
It’s amazing how quickly some lessons are unlearned.
Well, the Euros are not doing well with unemployment, hitting 9.2%, which is not as bad as it sounds, because the EU’s count is more accurate, and so generally excludes fewer people from the unemployment statistics, and because the social safety net is better there.
We have some good news in real estate, with pending existing home sales jumping, though the numbers are still awful, and large proportion of them are distressed sales.
Still, the most recent numbers on construction spending are grim, and you can see that it looks like non residential construction is due to start falling too.
Still the home sales number kept profit taking against oil to a minimum.
The dollar is getting interesting, as in the curse, “May you live in interesting times,” over the past few weeks. It hit another low for 2009:, and there is active talk about countries moving to some other currency, typically the Euro, Russia’s idea of some sort of “non western” reserve currency being a pipe dream.
So, the new unemployment claims numbers are out, and they are still bad, though a bit better, 623,000, down 13,000 from the last week, and the 4-week moving average fell 3K to 626,750.
That being said, the continuing claims were 6,788,000, up 110K, to yet another record, so layoffs may be slowing, but so is hiring.
My take: this is more businesses are running out of people to lay off than it is the economy improving.
On the other side of the pacific, Japanese retail sales rose, but the consensus is that this is a temporary blip, not a trend.
Reinforcing my “dead cat bounce” view is the fact that durable goods orders remain near a 13 year low. (There is also some very bad financial journalism around this story, which I will get to separately)
Meanwhile, in real estate new home sales rose even as prices continued their fall, and if you look at the sales there is a huge portion which are distressed properties, short sales or foreclosures.
It’s why we are seeing more stories about how there are No “move-up” buyers, selling their old house and upgrading.
There is very little equity for such a move currently, and with mortgage rates continuing their upward path, and delinquencies and foreclosures rising sharply, they broke another record in first quarter, I don’t see any signs of a real rebound in the sector.
Meanwhile, I wonder how much the relaxation of the credit crunch involves the rest of our economy. The metrics involving inter-bank lending show signs of a thaw, but US commercial paper fell to its lowest level in 8 years.
This is largely non-bank lending, and it’s absolutely comatose.
Menqhile in currency and energy, the dollar dropped, and the Yen dropped more/a>, on the (not really that) good durable goods numbers and unemployment figures, while oil was up on OPEC’s announcement of no production boosts.
So, it looks like the ratings agencies are beginning to do their job.
Of course, this is at absolutely the worst possible time for the economy, because it means that Standard & Poor’s is considering downgrading a large portion of the best quality commercial mortgage backed securities (CMBS):
As much as 90 percent of so-called super senior commercial- mortgage backed bonds sold in 2007 may be affected as the ratings firm changes how it assesses the debt, New York-based S&P said today in a report. About 25 percent of the bonds sold in 2005, and 60 percent of those sold in 2006 may be cut.
(emphasis mine)
This, among other news, is driving rates up on CMBS, though rising rates on treasuries, despite the best efforts of the Fed to hold rates down are a contributing factor.
Basically, people believe that we will be seeing higher interest rates in the near future, which drives rates up, particularly longer term rates, which is why the spread between the 2-year and the 10-year treasury have hit a new record.
It’s why mortgage rates are on the rise, driving down new mortgage applications.
In other banking news, the FDIC’s problem bank list is now more than 300, the highest number in fifteen years.
Meanwhile in energy and currency, oil is up on Saudi statements that the world economy can “handle” $75-$80/bbl oil, and the dollar rose on concerns about bad housing data.
Courtesy of Calculated Risk, I come across the term “loan recast.”
It’s similar to a “loan reset“, in that it means that your mortgage payments are increasing, but instead of being an increase in interest rates, it is a change in terms.
So, for example, if you have an interest-only or negative amortization mortgage, when the time comes to catch up, and make payments on principal, you have a recast.
They are in some ways much more worrisome than resets, because if a mortgage resets during a time of low interest rates, the payment may not change by much, but when a mortgage recasts, the payments go up regardless of the interest rates.
The yellow are recasts, and they look like a tsunami.
The graph on the right
Well, let’s lead with a rather unique bit of news, the volume of the derivatives market fell for the first time ever in the last 6 months of 2008.
The outstanding contracts fell by 15% to $592 trillion dollars (!!), or about forty times the GDP of the United States, and 110% of the entire planet.
My guess is that people suddenly realized that they had absolutely no idea at all what the hell they were holding, and started to unwind, because they did not know who they could trust.
It’s the sort of story I like, so I put it first even though by all rights the fact that Japan’s GDP fell at a 15.2% annualized rate in the first quarter of this year.
That’s Eastern Europe imploding numbers.
Export driven economies like Japan’s are going to take a hit, which is why
Moody’s is warning on possible downgrades of Asian banks, specifically those in Korea, Malaysia, the Philippines, and Indonesia.
Still we have a couple of glimmers on real estate, with the Architecture Billings Index holding steady in April, indicating that there future building is at least taking a pause downward, and mortgage applications rose in response to low interest rates, though much of that is refi activity.
Of course, the commercial real estate market market is still heading down sharply, which is why the Federal Reserve has expanded the TALF to include commercial mortgage backed securities.
Ending with oil and the US dollar, oil finished above $60 for the first time since November, $62.04/bbl, and the dollar hit a 5-month low on more optimism about the world economy.
I don’t get that last bit. All I see is a dead cat bounce.
Well, out in the real world, housing starts and housing permits both fell unexpectedly, and industrial production fell ½%, which looks bad, while the Baltic Dry Index, an index of ship activity, hit a 7 month high, mostly on Chinese demand for iron ore.
Note that the fall in housing starts and building premits was almost entirely related to a drop in construction of condominiums and apartments.
In the long run, this may be good news, as it means that the supply of new housing units is finally being outstripped by demand, as anemic as it is, which is a first step to recovery.
Note also, however, that housing starts is a leading indicator, and as such this does not speak well for “green shoots” in the economy.
My guess would be that that condos are driving this, as they used to be a step up to a stand alone house, but now people realize that a condo is as hard to get rid of as a case of herpes.
In the delusional world of bankers the news is fairly good, with the LIBOR hitting a to a 4 month low, the Volatility Index (VIX) below 30 for the first time since Lehman imploded, and >Barry Ritholtz’s semi regular credit crisis watch is showing signs of thawing in a number of metrics.
So at this point, the problem may be more the real economy than it is the banks, and the fact that Norway, the outlier in so many good ways, like its lack of corruption in a petro state, has finally joined the rest of Europe in a recession.
Meanwhile, it looks like Allstate and Ameriprise will not be among insurance companies taking TARP money.
I’m not sure if it’s the potential for pay limits, or the stigma, or the fact that they think that Geithner is a turd.
Meanwhile, in currency, the good news in the credit market pushed the dollar down on reduced demand for a safe haven.
Oil broke the $60/bbl barrier in interday trading, before settling at $59.65/bbl, largely on yet another refinery fire….Is it me, or is this beginning to sound awfully convenient?
I’m wondering if they timed it so that deferred maintenance would kick in just before the start of the Summer driving season.
OK, that’s three words, but the study by the National Association of Homebuilders and Wells Fargo Bank saying that houses are the most affordable in since the housing opportunity index started is 6 pounds of fertilizer in a 5 pounds bag.
Houses are still above historical trends, as are the rent/own ratio.
Don’t trust any numbers from homebuilders or realtors organizations.
