Page 2 of 3 CREDIT BUBBLE BULLETIN Mortgage madness
Commentary and weekly watch by Doug Noland
U.K. 10-year gilt yields jumped 17 bps to 3.67%, and German bund yields
increased 6 bps to 3.35%. The German DAX equities index was about unchanged (up
19.3% y-t-d). Japanese 10-year "JGB" yields increased 3.5 bps to 1.36%. The
Nikkei 225 added 0.2% (up 16.1%). Emerging equities were mixed and emerging
bonds came under pressure. Russia's RTS equities index jumped 3.9% to a new
2009 high (up 131.5%). India's Sensex equities declined 2.2% (up 72.3%).
China's Shanghai Exchange surged 4.4%, boosting 2009 gains to 70.7%. Brazil's
benchmark dollar bond yields jumped 21 bps to 5.10%. Brazil's Bovespa equities
index fell 1.7% (up 73.3% y-t-d). The Mexican Bolsa slipped 0.4% (up 36.8%
y-t-d). Mexico's 10-year $ yields jumped 18 bps to 5.33%.
Freddie Mac 30-year fixed mortgage rates increased 8 bps to
5.00% (down 104bps y-o-y). Fifteen-year fixed rates rose 6 bps to 4.43% (down
129bps y-o-y). One-year ARMs fell 6 bps to 4.54% (down 69bps y-o-y). Bankrate's
survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates up 5 bps
to 6.05% (down 141bps y-o-y).
Federal Reserve Credit surged $65.1bn last week to a 22-wk high $2.172 TN. Fed
Credit has declined $65.1bn y-t-d, although it expanded $366.6bn over the past
52 weeks (21%). Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this
past week (ended 10/22) jumped $22.6bn to a record $2.887 TN. "Custody
holdings" have expanded at an 18.2% rate y-t-d, and were up $378bn over the
past year, or 15.2%.
M2 (narrow) "money" supply declined $9.1bn to $8.332 TN (week of 10/12). Narrow
"money" has expanded at a 2.1% rate y-t-d and 5.2% over the past year. For the
week, Currency slipped $0.7bn, while Demand & Checkable Deposits added
$1.4bn. Savings Deposits rose $7.5bn, while Small Denominated Deposits fell
$8.0bn. Retail Money Funds declined $9.3bn.
Total Money Market Fund assets (from Invest Co Inst) fell $31.3bn to $3.372 TN.
Money fund assets have declined $458bn y-t-d, or 14.8% annualized. Money funds
declined $164bn, or 4.6%, over the past year.
Total Commercial Paper outstanding jumped $39.9bn (10-wk gain of $292bn) to
$1.366 TN. CP has declined $315bn y-t-d (23.2% annualized) and $83bn over the
past year (5.7%). Asset-backed CP increased $5.9bn to $549bn, with a 52-wk drop
of $146bn (21.1%).
International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $485bn y-o-y to a record $7.406 TN. Reserves have
increased $641bn year-to-date.
Global Credit Market Watch
October 22 - Bloomberg (Oshrat Carmiel): "Home sales in the Hamptons, the Long
Island beach retreats favored by Hollywood celebrities and Wall Street
financiers, surged 32% in the third quarter…"
October 22 - Bloomberg (Julianna Goldman, Ian Katz and Robert Schmidt): "The
Obama administration slammed Wall Street by ordering pay cuts of an average of
50% and caps on benefits for top executives at companies owing the government
billions of dollars from taxpayer-funded bailouts. The news triggered debate
about the government's reach into private industry, whether pay reductions
would spread to other companies and if a talent drain from US firms would
ensue. Others cheered the move."
Government Finance Bubble Watch
October 20 - Bloomberg: "Chinese central bank Vice Governor Ma Delun warned
that monetary-policy challenges will increase as expectations for a stronger
yuan boost inflows of capital. As global markets revive, 'capital flows
increase and the US dollar weakens, there will be an expectation for the yuan
to appreciate, leading a large amount of international capital to return,' Ma
said… Inflation pressures are building, and policy makers need to rein in the
effects of extra liquidity on asset and consumer prices, Ma said."
October 20 - Bloomberg (Andrew Atkinson): "Britain had the biggest budget
deficit for any September since records began in 1993 as the recession ravaged
tax revenue and drove up welfare costs. The 14.8 billion-pound ($24.3 billion)
shortfall compared with a deficit of 8.7 billion pounds a year earlier…"
October 22 - Bloomberg (Simone Meier): "The euro-area economy had a wider
budget deficit in 2008 than previously estimated, with five member states
breaching the European Union limit ... The total budget shortfall for the
16-nation euro region widened to 2% of gross domestic product last year ...
France, Spain, Greece, Ireland and Malta had 2008 deficits above the EU limit
of 3% of GDP."
October 22 - Bloomberg (Steve Scherer): "European countries' rising debt won't
trigger across-the-board credit-rating downgrades because countries are
measured relative to each other, Moody's… said… Moody's ranks Germany and
France among the countries with the highest credit ratings. European
governments spent billions of euros to fight the region's worst recession since
World War II. As a result, the commission forecasts that euro-area debt will
rise to 77.7% this year from 69.3%..."
Currency Watch
The dollar index slipped 0.2% to 75.47. For the week on the upside, the Swedish
krona increased 2.4%, the New Zealand dollar 1.9%, the Norwegian krone 0.9%,
the Swiss franc 0.8%, the Danish krone 0.6%, the Australian dollar 0.6% and the
Euro 0.6%. For the week on the downside, the the South African rand declined
1.5%, the Canadian dollar 1.5%, the South Korean won 1.5%, the Japanese yen
1.3%, and the Brazilian real 0.4%.
Commodities Watch
October 22 - Bloomberg (Jana Randow): "Oil is 'too cheap' and should rise to
$88 a barrel in coming months after the dollar's decline against the euro, a
DekaBank study suggests ... 'Oil is too cheap at the moment,' said Christian
Melzer… foreign exchange analyst at DekaBank… The study shows that over the
last 10 years "oil prices have adjusted to changes in the euro-dollar exchange
rate," he said."
October 22 - Bloomberg: "Investor Jim Rogers took a 'senior consultant'
position with China's Dalian Commodity Exchange because he is 'excited' about
the exchange's efforts to grow. 'I expect China to become the commodity trading
center of the world once they open their currency and open their economy,'
Rogers said… 'I'm keen on all the three exchanges but I'm excited about what
they're doing in Dalian.'"
Yet another solid week for most commodities. The CRB index gained 1.5% (up
22.1% y-t-d). The Goldman Sachs Commodities Index (GSCI) jumped 2.2% (up 48.8%
y-t-d). Gold added 0.2% to close at $1,055 (up 19.6% y-t-d). Silver gained 1.7%
to $17.71 (up 56.8% y-t-d). December Crude gained $1.00 to $80.02 (up 79%
y-t-d). November Gasoline jumped 3.0% (up 92% y-t-d), and November Natural Gas
added 0.6% (down 14% y-t-d). December Copper surged 6.2% to a one-year high (up
114% y-t-d). December Wheat rocketed 9.8% higher (down 10% y-t-d), and December
Corn jumped 6.9% (down 2% y-t-d).
China Bubble Watch
October 22 - Bloomberg: "China's economy expanded at the fastest pace in a year
as stimulus spending and record lending growth helped the nation lead the world
out of recession. Gross domestic product rose 8.9% in the third quarter from a
year earlier…"
October 21 - Financial Times (Geoff Dyer): "China needs an 'urgent' tightening
of monetary policy to prevent the huge stimulus measures introduced this year
from inflating stock and property bubbles, one of the country's leading bankers
has warned. Qin Xiao - chairman of China Merchants Bank, the country's
sixth-biggest - says… 'Monetary policy must not neglect asset-price movements…
Therefore it is urgent that China shifts from a loose monetary policy stance to
a neutral one.' Mr Qin's unusually frank warning comes ahead of… third-quarter
gross domestic product figures…"
October 22 - Bloomberg: "China is risking property-market 'bubbles' to
encourage growth in the world's third-largest economy, according to former
Morgan Stanley Asian economist Andy Xie. 'People are looking at the bubbles as
a way to gain economic growth in the short term,' Xie said… 'They are not sure
of long-term damages that they may suffer… Land prices have become so elevated…
The economy has become so dependent on property and the prices are so high and
it carries a lot of risk for the country going forward.'"
October 22 - Bloomberg: "China urged its banks to lend 'reasonably' this
quarter, after a surge in credit increased risks in the nation's banking
system. The China Banking Regulatory Commission will closely monitor the impact
of global capital flows and domestic policy adjustments on liquidity in the
banking system, Chairman Liu Mingkang said… The CBRC will ensure that 'ample
liquidity is always maintained,' he said. Chinese banks doled out a record 8.67
trillion yuan ($1.27 trillion) of new loans in the first nine months, an
increase of about 150% from the same period a year earlier…"
Japan Watch
October 19 - Bloomberg (Mayumi Otsuma): "The Bank of Japan said the economy is
improving in all of the country's nine areas as the nation emerges from its
worst postwar recession."
October 22 - Bloomberg (Jason Clenfield): "Japan's exports fell at the slowest
pace in 10 months in September as stimulus spending in China drove demand for
the nation's cars and machinery. Shipments abroad dropped 30.7% from a year
earlier, compared with a 36% decline in August…"
India Watch
October 22 - Bloomberg (Anil Varma): "India's central bank said it faces a
'major challenge' in managing the government's debt sale plan, which has fueled
a record jump in bond yields this year and made it 'difficult' to keep prices
stable."
Asia Bubble Watch
October 22 - Bloomberg (Joyce Koh): "Asia's rich are again favoring the
leveraged investments that backfired on them during last year's market turmoil,
according to the head of DBS Group Holdings Ltd.'s wealth management unit.
'Investors have short memories,' Amy Yip, who oversaw Hong Kong's $245 billion
foreign-reserves fund before joining Southeast Asia's biggest bank in 2006,
said… 'Many of the Asian clients are back in the very aggressive leveraged
posture that they had adopted in the fall of 2008.' Rich investors in Asia are
borrowing more to fuel returns, spurred by record-low interest rates and a
stock market recovery."
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