Fed is Behind the Curve on U.S. Economy, HSBC Banker Says The U.S. Federal Reserve will face a “credibility moment” in coming months as an accelerating U.S. recovery shows that the central bank has been too cautious in its outlook, HSBC’s global chief investment officer for fixed income said.
(…) Mr. Baraton said he sees evidence that business and consumer lending are gathering momentum. Inflation is not a major threat but is likely to rise soon to 2% on-year or higher, up from 1%-1.5% recently, he said.
The market may be mistaken in anticipating that the Fed will remain cautious in coming years, Mr. Baraton said.
“The market is translating this (dovish) consciousness over the next four to five years, which does not make complete sense to us,” he said. “A year from now the unemployment rate will be lower, quality job growth will be even more visible, wage growth will be higher and inflation will be higher,” Mr. Baraton said.
The rating firm cited the expectation of a significant slowdown in residential-property sales growth, high inventory levels and weakening liquidity over the coming 12 months. (…)
“We expect modest 0%-5% year-over-year growth (on a 12-month trailing basis) over the next 12 months. This growth rate is materially lower than the 26.6% year-on-year rise in nationwide cumulative contracted sales in full year 2013,” said Franco Leung, a Moody’s assistant vice president and analyst, in a news release. (…)
In April, average new-home prices in 70 Chinese cities rose 6.4% from a year earlier in April, according to calculations by The Wall Street Journal based on data from the National Bureau of Statistics. This compares with a year-over-year rise of 7.3% in March and 8.2% in February. The April figure represents the slowest on-year growth since June.
(…) high frequency data indicates that real estate sales growth Y/Y has improved over the past few weeks. Real estate sales growth Y/Y is likely to recover further due to a low base effect. Third, real consumption growth Y/Y in April increased. Finally, electricity output growth Y/Y (3 months moving average) remains high. Although recent data indicates that the economy remains weak, the data is not weak enough to motivate broad-based policy action.
(…) And even then you’ll be unable to qualify for a good number of homes on the market. That salary makes the City by the Bay the least affordable major city in the country, said HSH, which gathers its estimates using its own mortgage data and home-price estimates from the National Association of Realtors. (…)
The cheapest city was Cleveland, where a family could buy a median-priced home with an after-tax income just under $30,000, followed by Pittsburgh, St. Louis and Cincinnati.
Note that the data is sorted by the salary needed to finance the median priced home with a standard 28 percent “front-end” debt ratio and a 20 percent down payment:
How do these metropolitan area real estate costs stack up against each other and the US median household income? Here is a column chart to which I’ve added the latest Sentier Research data for the US median household income as of March 2014.
Another proof that national affordability ratios can be deceiving.
(…) The Federal Reserve and the Office of the Comptroller of the Currency issued guidance last year urging banks to avoid financing LBOs that leave a company with debt of more than six times its Ebitda, but 40% of private-equity deals this year have exceeded that level.
Such lending all but disappeared during the financial crisis but has risen every year since 2009. The bankers say that despite the guidance, actual policy remains unclear, because the Fed and the OCC don’t appear to agree with one another. The OCC has articulated a “no exceptions” policy, whereas the Fed has said that some LBO deals can stray from the guidance.
When was the last time the S&P 500 fell 15%? It’s been three years! Speaking of three years, three years ago this past week the Power of the Pattern shared that the world was creating look-alike bearish patterns at resistance (see here). What happened after the post? By October of 2011, the S&P 500 was 15% lower.
The global 4-pack below illustrates that these indexes are up against key resistance lines of bearish rising wedges, as the applied volatility on the VIX is hitting the lowest levels ever recorded (not shown).
The next chart reflects that 5 of the last 7 Mays, the Russell 2000 has reached a high and given back some gains. At this time the Russell is breaking below support of this bearish rising wedge.
Can global markets break resistance? Sure they can … anything is possible! These patterns do suggest caution when it comes to portfolio construction until resistance is taken out!
Some more technical stuff from the Short Side of Long blog:
The first chart displays a rising broad market, while the number of new highs relative to new lows is slowly, but surely decreasing. We have seen similar market breadth conditions to these near major market peaks before. These include the peak in 2007 and 2011.
Consider that in late December 2013, the NYSE ratio between new highs and lows stood at 319 as S&P 500 flirted with 1,850. While S&P rallied towards a higher high in March of this year, breadth ratio only managed to post a reading of 291. Recent record intra day highs at 1,902 on the S&P have proceeded with an even lower ratio numbers of 151.
The current bearish breadth divergence between the rising index and fewer new highs, has actually been in progress for several months now (since October 2013) and is usually a warning signal of a possible market top.
NYSE high low ratio is resembling a pattern since in ’07 & ’11!
I am not a big fan of such technical analysis but there is something to the A/D ratio that makes some sense. I also note that similar but smaller divergences took place twice during 2012.
Last months technology breakdown is still not oversold just yet