Edge and Odds - Edge and Odds

Yellen Puts Fed on Path to Lift Rates Federal Reserve Chairwoman Janet Yellen, sounding upbeat about the economy, started laying the groundwork for interest-rate increases later this year.

(…) If the economy continues to strengthen as the Fed anticipates and officials become more confident that low inflation will rise toward their 2% goal, she said, the central bank “will at some point begin considering an increase in the target range for the federal funds rate.”

With that assessment, Ms. Yellen took an incremental step, shifting the central bank away from promises that interest rates will stay low and toward a discussion of when and how fast they will move up. (…)

She repeated the promise of patience Tuesday, but this time she broached the idea of moving beyond it as well, saying that before rates increase, the patience assurance would be changed. (…)

“It is important to emphasize that a modification of the [interest-rate] guidance should not be read as indicating that the [Fed] will necessarily increase the target rate in a couple of meetings,” Ms. Yellen told the Senate panel.

Instead, she said, a change in the language would put on the table for discussion the possibility of raising rates after two meetings.

“The modification should be understood as reflecting the [Fed’s] judgment that conditions have improved to the point where it will soon be the case that a change in the target range could be warranted at any meeting,” she said.

“There is this kind of talk therapy going on,” said Ethan Harris, chief economist at Bank of America Merrill Lynch. “She tells the markets not to worry about this and don’t worry about that. Today she told the market, ‘Don’t worry if we remove patience.’ ” (…)

It now seems that the deflation/inflation theme is taking over from the economy theme.

Deflation Threat Grows in Europe Consumer prices across the European Union fell in January at the fastest rate since records began in 1997, increasing the risk that the 28-member bloc will slide into deflation.

Eurostat on Tuesday said consumer prices in the 28-nation bloc fell 0.5% in January from a year earlier, and confirmed data that showed prices in the eurozone were 0.6% lower.

Here’s the important breakdown that the WSJ did not even care to mention: ex-Energy, annual inflation declined to +0.4%; core CPI is +0.6%. Importantly, inflation ex-energy collapsed into strong deflation on a MoM basis: CPI ex-Energy was –1.4% in January. Core CPI (ex-Food, x-Energy) cratered –1.9% in January. These inflation gauges had been essentially flat since September.

Commodity Index’s Nosedive Points to Global Slowdown

A gauge of growth rates for raw materials including cattle hides, tallow, plywood and burlap has been signaling economic contraction since September. The last time the growth rate of the JoC-ECRI Industrial Materials Price Index was falling to these levels, the world was mired in recession. “The decline in commodity prices is consistent with a prolonged period of slow global growth,” Alan Greenspan, the former chairman of the Federal Reserve, said in a Feb. 18 telephone interview. “We may very well be accelerating in the months ahead, but evidence is hard to find in the data.” A major reason is slowing growth in China, the world’s biggest user of metals, grains and energy, and weakening economies across Europe. While demand suffers, output has surged for everything from oil to wheat, creating global surpluses that sent prices plunging.

Oil rises to $59 as Saudis say demand growing Brent crude oil rose to around $59 a barrel on Wednesday after data showed Chinese factories were producing more than expected and Saudi Arabia’s oil minister said oil demand was growing.

“Markets are calm now … demand is growing,” said Naimi, who was behind a change in the strategy of the Organization of the Petroleum Exporting Countries last year, when it decided not to adjust production despite a sharp fall in oil prices.

That’s all?

CHANGE IN DEBT/GDP RATIOS

From FT Alphaville:

Brussels signs off on Greek reform plan European Commission says measures should be approved

U.S. Home Sales Falter to Start Year Sales of previously owned homes slowed in January, a reflection of the rising prices and tight supplies that could constrain the housing market this year.

Existing-home sales fell 4.9% last month from December to a seasonally adjusted annual rate of 4.82 million, the National Association of Realtors said on Monday, the slowest pace in nine months.

From Haver Analytics:

Single-family home sales fell 5.1% last month (+3.9% y/y) to 4.270 million, also a nine-month low, after a 3.4% rise. Condo and co-op sales declined 3.5% last month (-1.8% y/y) to 0.550 million, the lowest level since March.

The median sales price of an existing home declined 4.1% to $199,600 from $208,200, revised from $209,500. The latest decline was the sixth in the last seven months but prices remained 6.2% higher than last year. The average sales price fell 2.6% (+4.9% y/y) to $248,100, also the sixth decline in seven months.

By region, sales in the West declined 7.1% (+1.0% y/y), the third decline in four months. Sales in the Northeast were off 6.0% (+3.3% y/y), the third straight monthly drop. In the South, sales fell 4.6% (+5.6% y/y), the second shortfall in three months. Sales in the Midwest were off 2.7% (+0.9% y/y), the fourth decline in five months.

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Sad smile This is surprisingly bad and does not bode well for the housing market. Sales have been weak across the U.S. in recent months.

Fingers crossed But CalculatedRisk does the more optimistic calculation:

Inventory is still very low (down 0.5% year-over-year in January). This will be important to watch over the next few months at the start of the Spring buying season.

Also, the NAR reported total sales were up 3.2% from January 2014, however normal equity sales were up even more, and distressed sales down sharply. From the NAR (from a survey that is far from perfect):

Distressed sales – foreclosures and short sales – were 11 percent of sales in January, unchanged from last month but down from 15 percent a year ago. Eight percent of January sales were foreclosures and 3 percent were short sales.

Last year in December the NAR reported that 15% of sales were distressed sales.

A rough estimate: Sales in January 2014 were reported at 4.67 million SAAR with 15% distressed. That gives 701 thousand distressed (annual rate), and 3.97 million equity / non-distressed. In January 2015, sales were 4.82 million SAAR, with 11% distressed. That gives 530 thousand distressed – a decline of about 24% from January 2014 – and 4.29 million equity. Although this survey isn’t perfect, this suggests distressed sales were down sharply – and normal sales up around 8%.

If total existing sales decline a little, or move side-ways – due to fewer distressed sales- that is a positive sign for real estate.

Chicago Fed: Economic Growth Picked Up Slightly in January

Led by improvements in production-related indicators, the Chicago Fed National Activity Index (CFNAI) edged up to +0.13 in January from –0.07 in December. Three of the four broad categories of indicators that make up the index increased from December, and only one of the four categories made a negative contribution to the index in January.

The index’s three-month moving average, CFNAI-MA3, ticked down to +0.33 in January from +0.34 in December. January’s CFNAI-MA3 suggests that growth in national economic activity was above its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests modest inflationary pressure from economic activity over the coming year.

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The CFNAI Diffusion Index, which is also a three-month moving average, increased slightly to +0.20 in January from +0.16 in December. Forty-eight of the 85 individual indicators made positive contributions to the CFNAI in January, while 37 made negative contributions. Forty-three indicators improved from December to January, while 42 indicators deteriorated. Of the indicators that improved, 14 made negative contributions.

Evercore ISI company surveys have been declining lately. The surveys also reveal that retailers’ pricing power keeps weakening after falling abruptly during the latter part of 2014.

ISI cut its 2015 S&P earnings estimate from $127 to $122 a few weeks ago. Last week it cut it to $120.

Industrial Commodity Prices Stabilize

Supporting the deflation theme:

The industrial commodity price index from the Foundation for International Business and Economic Research (FIBER) improved slightly during the last five weeks following declines which total 13.1% during the last year.

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Selected commodities YoY as of Feb. 19: Cotton: –23.3%, copper: –21.2%, Steel scrap: –39.4%, Lumber: –6.9%, Rubber: –14.5%.

German Consumers Lift Eurozone Economy

(…) German gross domestic product rose 0.7% in the final three months of the year from the third quarter, according to the latest price-, seasonally and calendar-adjusted figures, the Federal Statistics Office Destatis said, confirming its earlier estimate. Consumption outlays made a 0.5 percentage point contribution to GDP growth in the fourth quarter, the data showed.

Investments in machinery and vehicles were the other surprise, increasing 0.4% on the quarter in price-adjusted terms after posting a 1.4% drop in the third quarter. Building investment increased 2.1% on the quarter, which Destatis attributed to growth in both residential construction and public works. Demand for housing in Germany has increased and prices in certain areas have spiked since 2010 due to low interest rates and high liquidity, according to the Bundesbank. (…)

Slide in China land under new development Drop of 25% comes amid growing calls for interest rate cut

Property sales in major cities in the week before the Chinese new year holiday, which officially began on February 18, fell by about 20 per cent from the corresponding week a year earlier.

Turkish Central Bank Cuts All Three Main Interest Rates

Brazil Experts Fear a Two-Year Downturn Economists say nation is likely to suffer first back-to-back decline in GDP since 1930s.

OIL

Oil slide could trigger Opec emergency meeting Growing alarm over impact on members’ economies

Members of Opec have discussed holding an emergency meeting if crude continues to slide, according to Nigeria’s oil minister, in a sign of their growing alarm over the impact of a lower oil price on their economies. (…)

“Almost all Opec countries, except perhaps the Arab bloc, are very uncomfortable,” said Ms Alison-Madueke, who as president of Opec is responsible for liaising with member countries and the producer group’s secretary-general in the event of an emergency meeting. (…)

If the price “slips any further it is highly likely that I will have to call an extraordinary meeting of Opec in the next six weeks or so”, she said in an interview with the Financial Times. “We’re already talking with member countries.”

But market analysts say it is highly unlikely that Saudi Arabia, Opec’s de facto leader, will agree to such a meeting. (…)

Oil rebounds above $59 after Libya’s largest field shuts Brent crude oil reversed early losses to trade back above $59 a barrel on Tuesday as Libya’s largest oilfield stopped production, and as traders awaited U.S. oil inventory data to see whether it would show another large increase.

The Sarir oilfield in Libya shut because of a power cut, in a further blow to exports from the OPEC member.

Oil Prices Rise on Signs of Increased Demand

Energy Aspects, a research consultancy, estimated that global demand for crude reached a record high in December and grew at its quickest pace in 18 months. (…)

Energy Aspects estimates that global oil demand reached a record high of 94 million barrels a day in December. This represents a year-on-year growth of 2.2 million barrels a day, the strongest in the last 18 months. The consultancy sees the momentum continuing so far this year and expects 2015 global demand growth of 1 million barrels a day.

Still, Energy Aspects expects significant short-term pressure for oil prices as current prices aren’t low enough for the market to balance.

“Prices stabilizing at $60-$70 is just high enough to keep U.S. tight oil production growing, albeit at a much lower 0.5 million barrels a day, and not low enough to result in outright project cancellations,” it said. (…)

North Sea Oil Production Continues to Slide Oil production in the British section of the North Sea declined in 2014 amid rising costs, high taxes and low oil prices, underscoring the need for more investment and exploration there, an industry association said.

British North Sea production fell by 1.1% in 2014 compared with the previous year to 1.42 million barrels of oil equivalent a day, the report said. That is down around 70% since the North Sea’s peak in 1999.

Production could reach 1.43 million barrels a day this year if projects proceed as planned. (…)

Capital investment in the U.K. North Sea is expected to fall this year by as much as 36% to £9.5 billion to £11.3 billion from £14.8 billion in 2014 as investment in new projects dries up, Oil & Gas U.K. said.

Big Banks Scrutinized Over Metals Pricing U.S. officials are investigating at least 10 major banks for possible rigging of precious-metals markets.

The metals investigation, which is in the early stages, broadens the Justice Department’s ongoing scrutiny of banks over manipulation of financial benchmarks. Prosecutors are conducting criminal investigations into the alleged rigging of interbank lending rates and currency markets.

U.S. Presses Mortgage Cases With Morgan Stanley, Goldman Sachs Morgan Stanley and Goldman Sachs Group Inc. are inching closer to resolving U.S. claims that the two Wall Street firms misled investors in mortgage bonds that plummeted in value during the financial crisis.

Sick smile So, all said and done, seems that big banks rig just about everything. So, the next item is nothing to make us cry…

HSBC chief says bankers face double standards Business held to higher account than bishops, says Gulliver

U.S., Iran Explore Option of 10-Year Nuclear Freeze The U.S. and Iran are exploring a nuclear deal that would keep Tehran from amassing enough material to make a bomb for at least a decade, but could then allow it to gradually build up its capabilities again.

Yellen Puts Fed on Path to Lift Rates Federal Reserve Chairwoman Janet Yellen, sounding upbeat about the economy, started laying the groundwork for interest-rate increases later this year.

Deflation Threat Grows in Europe Consumer prices across the European Union fell in January at the fastest rate since records began in 1997, increasing the risk that the 28-member bloc will slide into deflation.

Oil rises to $59 as Saudis say demand growing Brent crude oil rose to around $59 a barrel on Wednesday after data showed Chinese factories were producing more than expected and Saudi Arabia’s oil minister said oil demand was growing.

CHANGE IN DEBT/GDP RATIOS

Brussels signs off on Greek reform plan European Commission says measures should be approved

U.S. Home Sales Falter to Start Year Sales of previously owned homes slowed in January, a reflection of the rising prices and tight supplies that could constrain the housing market this year.

Slide in China land under new development Drop of 25% comes amid growing calls for interest rate cut

Brazil Experts Fear a Two-Year Downturn Economists say nation is likely to suffer first back-to-back decline in GDP since 1930s.

OIL

Oil slide could trigger Opec emergency meeting Growing alarm over impact on members’ economies

Oil rebounds above $59 after Libya’s largest field shuts Brent crude oil reversed early losses to trade back above $59 a barrel on Tuesday as Libya’s largest oilfield stopped production, and as traders awaited U.S. oil inventory data to see whether it would show another large increase.

North Sea Oil Production Continues to Slide Oil production in the British section of the North Sea declined in 2014 amid rising costs, high taxes and low oil prices, underscoring the need for more investment and exploration there, an industry association said.

Big Banks Scrutinized Over Metals Pricing U.S. officials are investigating at least 10 major banks for possible rigging of precious-metals markets.

U.S. Presses Mortgage Cases With Morgan Stanley, Goldman Sachs Morgan Stanley and Goldman Sachs Group Inc. are inching closer to resolving U.S. claims that the two Wall Street firms misled investors in mortgage bonds that plummeted in value during the financial crisis.

HSBC chief says bankers face double standards Business held to higher account than bishops, says Gulliver

U.S., Iran Explore Option of 10-Year Nuclear Freeze The U.S. and Iran are exploring a nuclear deal that would keep Tehran from amassing enough material to make a bomb for at least a decade, but could then allow it to gradually build up its capabilities again.