There are no big themes dominating the news today. So it is a perfect time to hit a couple of themes with an economic and market theme approach. Let’s talk banks, Japanese trade, the currency wars and deflation.
Today’s post is a potpourri of events I am seeing from around the world that impinge on macro. Europe. As expected, European consumer price inflation came in at 0.5% following the unexpected dip in German inflation. I believe the ECB will act on this, but not just via an interest rate cut but also with some other non-traditional form of […]
Topics for today: Tail risk from Ukraine is increasing, giving rise to investment opportunity Argentina is still a basket case US housing will not add appreciably to a US growth acceleration I think the big news in the markets is still Ukraine. When I last wrote about the situation in Ukraine, I warned that, “It looks like we will get […]
For years mortgage rates on “jumbo” loans have been higher than for traditional (conforming) mortgages. Since jumbo loans were larger than the upper limit permitted to be packaged and sold to Fannie and Freddie, banks would typically charge a premium for “illiquidity” on these products. But starting last year conforming mortgages became more expensive for borrowers than jumbo loans.
Fitch, the ratings agency, has reversed itself on Canada. It now believes that the housing market there is poised for only modest declines at worst. Previously, Fitch had said that Canada’s housing market was well overpriced and that a major correction was a serious risk. I believe the combination of high prices and high household debt means the risk of a major correction is still there.
The latest flow of funds data from the US Federal Reserve show that the great American household deleveraging may be over. This should add a credit accelerator to the US economy which maintains growth. Meanwhile analysts are increasingly optimistic about US and global economic fortunes. Data points and analysis follow.
At its current pace the Fed is taking about half a trillion of MBS securities out of the market. In fact the Fed is now removing more than 100% of the paper that is being issued.
The recent increase in long-term rates is causing major changes in the mortgage markets. Here are some key trends
While the US housing market remains relatively robust, it is likely to face a couple of headwinds going forward. One is the lower affordability index. The other is the recent slowdown in net household formation.
With wages stagnant, the proportion of income going into rent is on the rise. While homeowners have been able to reduce their monthly payments to the lowest level in decades via mortgage refinancing and cutting back on credit card usage, the financial obligations ratio for renters has been on the rise.
So imagine you are a moderate FOMC member. This is the economic situation you face and the trade-offs in terms of policy tools.
The central banks in Sweden and Germany are concerned about overheating economies as the European sovereign debt crisis has led to a net inflow of investment into their housing sectors. If one looks at European economic policy, these bubbles are the natural outgrowth of a continued over-reliance on monetary policy in economic orthodoxy. More bubbles will follow.