Page 4 of
5 Tight
'money' Commentary and weekly
review by Doug Noland
interest
rates, economists said after prices jumped in
Germany… ‘Faster than expected inflation is a
major headache for the ECB,’ said Stephane Deo,
chief European economist at UBS AG… ‘If inflation
expectations get dislodged, the ECB will face a
credibility crisis and it will have to raise
rates.’"
November 30 – Bloomberg (Fergal
O’Brien): "European inflation accelerated in
November to the fastest in more than six years,
adding pressure on the European Central Bank to
raise interest
rates
even as economic expansion cools. The inflation
rate in the 13-nation euro area rose to 3% this
month from 2.6% in October…"
November 29 –
Market News International: "UK mortgage approvals
slumped in October, underscoring the rapid cooling
in the housing market… Mortgage approvals fell to
88,000 in October from 100,000 in September, the
lowest outturn since Feb 2005."
November
29 – Bloomberg (Fergal O’Brien): "Irish housing
starts fell 51% in October from a year earlier as
property demand cooled and builders cut back on
projects… In the 10 months through October, starts
were down 33% from a year earlier."
November 30 – Bloomberg (Joshua Gallu):
"Switzerland’s inflation rate rose to the highest
level in more than six years in November… Consumer
prices gained 1.8% from a year earlier, compared
with a rate of 1.3% in the previous month…"
November 26– Bloomberg (Ben Sills):
"Producer prices in Spain accelerated in October
for a second month in three… The price of goods
leaving Spain's factories, farms and mines rose
4.7% from the year earlier period after a 3.4%
increase in September…"
November 29 –
Bloomberg (Robin Wigglesworth): "Norway’s
statistics agency raised its forecast for economic
growth this year for a second time, predicting the
mainland economy will expand at the fastest pace
since 1985. The mainland economy…will grow
5.7%..."
Bubble Economy
Watch November 29 – EconoPlay.com (Gary
Rosenberger): "New vehicle sales were adrift in
November – and fell sharply in regions where
housing was hardest hit – with no amount of
factory incentives able to get the market rolling…
The dominant issues were collateral damage from
the housing market and a growing population of
credit-challenged consumers… ‘I’ve never seen it
this slow. GM has the big Red Tag sale going on
right now, but it hasn’t moved the needle for us.
I don’t think they could give away cars, it’s so
bad,’ said Dennis Fitzpatrick of Fitzpatrick
Chevrolet Buick Hummer in Concord, California…
‘I’m looking at everybody’s numbers, and they’re
not good. The housing market is in the tank. There
are foreclosures all over the place. Ancillary
businesses like mine are affected. I have never
seen so many credit-challenged people coming in to
my dealership.’ He sees people with 450 to 500
FICO scores who would never qualify for the
zero-percent financing incentives that drew them
in the first place. ‘Every single deal is a
struggle to get bought by the finance companies,’
he said. ‘They’re coming in upside down on their
home mortgages. They have no money to put down.
Their credit sheets are horrible. They’re broke.’"
Central Banker Watch November 30
– Dow Jones (Brian Blackstone): "Federal Reserve
Bank of St. Louis President William Poole Friday
said any concerns that rate reductions might be
interpreted as bailing out investors and spurring
risky behavior wouldn’t prevent him from cutting
rates aggressively if he thought it was warranted.
‘I wouldn’t want people in the markets to believe
that I, at any rate, would be so concerned about
the moral hazard argument that I wouldn't possibly
advocate a 25-basis-point or a 50-basis-point cut
(in the federal-funds rate) or whatever might be
on the table," Poole told reporters…"
November 27 – Financial Times (Michael
Mackenzie and Saskia Scholtes): "Four months after
the credit squeeze first gripped US money markets,
traders are losing confidence that the New York
Federal Reserve is able to get the market for
so-called Fed funds under control again.
Yesterday, the New York Fed said it would conduct
the first of a series of term repurchase
agreements designed to help prevent the funds rate
from rising sharply above its target around the
end of the year. The effective Fed funds rate has
oscillated round the target rate, or the interest
rate set by the Federal Reserve's Open Market
Committee. The Fed’s lack of success in
controlling the funds rate has maintained stress
in the interbank lending market as banks face
balance sheet constraints near the end of their
financial year. ‘The fact that funds rate
expectations have become unanchored is itself a
source of instability,’ said Lou Crandall,
economist at…Wrightson ICAP."
November 28
– Financial Times (Ralph Atkins and Krishna Guha):
"Soaring eurozone inflation is threatening fresh
difficulties for the European Central Bank as it
fights to calm tensions in financial markets that
are casting a shadow over economic growth in the
13-country region. Energy and food prices pushed
inflation in Germany this month to the highest
level since at least 1995, leading economists to
forecast the annual eurozone figure…would reach 3%
or above for the first time in more than six
years. That would pose a serious challenge to the
ECB, which pledges to keep inflation ‘below but
close’ to 2%. The Federal Reserve faces a similar
dilemma in the US, where consumer price inflation
hit an annual rate of 3.5% last month, and could
approach 4% in the coming months, in spite of
sharply slowing growth… Moreover, unlike the ECB,
the Fed has to worry about the effects of currency
weakness on prices."
GSE
Watch November 29 – Bloomberg (James
Tyson): "Freddie Mac…sold $6 billion of
non-convertible preferred stock to bolster capital
amid a deepening housing slump. The stock will pay
an 8.375% fixed dividend for five years and then
shift to 7.875% or to 416 basis points above the
three-month London interbank offered rate…"
California Watch November 28 -
California Association of Realtors (C.A.R): "Home
sales decreased 40.2% in October in California
compared with the same period a year ago, while
the median price of an existing home fell 9.9%...
'Financing issues have dogged entry-level buyers
since early 2007, but they spilled over into the
middle and upper-tier markets in the last few
months,' said C.A.R. President William E. Brown.
'The decline in sales at the upper end of the
market contributed to a significant decline in the
statewide median price as even well-qualified
borrowers had difficulty securing financing.'"
California's statewide median price was
down $33,720 to $497,110, putting the two-month
decline at a remarkable $91,860. The month's
supply of home inventories was down slightly from
September to 16.3 months, this compares, however,
to the year ago 6.4 months.
MBS/ABS/CDO/CP/Money Funds and
Derivatives Watch November 28– Bloomberg
(Jody Shenn): "Fraud by subprime mortgage
borrowers in recent years played a significant
role in the unexpectedly high number of defaults,
Fitch Ratings said, citing loan documents. Fitch’s
review of documents for 45 loans that were
packaged into bonds last year and defaulted within
six months found two-thirds contained occupancy
fraud, in which borrowers falsely claimed they
planned to live in properties. ‘Almost every file’
indicated some type of fraud or misstatement of
the borrower’s financial condition that was missed
or encouraged by lenders, Fitch said… ‘While we
realize this was a very limited sample, Fitch
believes that the findings are indicative of the
types and magnitude’ of the issues, wrote Glenn
Costello, Diane Pendley and Mary Kelsch, analysts
at the…firm."
November 27– Bloomberg (Jody
Shenn): "Defaults on subprime mortgages rose last
month, as the U.S. real estate slump made it
harder to sell homes or refinance loans, according
to data on the debt underlying benchmark ABX
derivatives. About 23.4% of loan balances from 20
subprime bonds created in the first half of 2006
were at least 60 days late, in foreclosure,
subject to borrower bankruptcy or were already
turned into seized property, up 1.76 percentage
points from September…"
November 30 –
Bloomberg (Mark Rohner and Sharon L. Crenson):
"One third of adjustable-rate subprime home loans
in the U.S. were delinquent as of August,
according to a study by the Federal Reserve Bank
of New York."
November 26– The Wall Street
Journal (Ruth Simon): "The subprime mortgage
crisis is poised to get much worse. Next year,
interest rates are set to rise -- or ‘reset’ -- on
$362 billion worth of adjustable-rate subprime
mortgages, according to…Bank of America… While
many accounts portray resetting rates as the big
factor behind the surge in home-loan defaults and
foreclosures this year, that isn’t quite the case.
Many of the subprime mortgages that have driven up
the default rate went bad in their first year or
so, well before their interest rate had a chance
to go higher. Some of these mortgages went to
speculators who planned to flip their houses,
others to borrowers who had stretched too far to
make their payments, and still others had some
element of fraud. Now the real crest of the reset
wave is coming, and that promises more pain for
borrowers, lenders and Wall Street."
November 28 – Bloomberg (John Glover and
Jody Shenn): "In the bond market, commercial
property investors are about as creditworthy as
U.S. homeowners with subprime mortgages.
‘Commercial real estate is a full-blown bubble
that feels very much at a bursting point,’ said
Christian Stracke, an analyst…at CreditSights Inc…
‘There’s a fairly toxic mix of factors at work.’
The cost of derivatives protecting investors from
defaults on the highest-rated bonds backed by
properties more than doubled in the past month,
according to Markit Group Ltd. Prices suggest
traders anticipate defaults rising to the highest
level since the Great Depression, according to
analysts at RBS Greenwich Capital… The seven-year
rally in offices and retail properties ended in
September when prices fell an average of 1.2%,
according to Moody’s… More losses are likely
because banks are holding $54 billion of
commercial mortgages they can’t sell, data
compiled by …Citigroup Inc. show."
Mortgage Finance Bust
Watch November 27– The Wall Street Journal
(James R. Hagerty): "Sen. Charles Schumer…urged
regulators to examine potential risks posed by a
sharp increase in lending by the Federal Home Loan
Bank of Atlanta to Countrywide Financial Corp… In
a letter sent
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