February 22, 2010
After a volatile week of trading, equity markets settled down tremendously this past week, gradually tacking on a 3.0% gain for the S&P 500 index in the holiday-shortened week. Â
There was no one catalyst behind the rally, but subsiding fears about the impact of Greece on global markets proved supportive. The CBOE Volatility Index (VIX), which spiked in mid-January, has been steadily declining since early February, going from a high of 27 to 20 more recently.
Source: Bloomberg
On the housing front, the Mortgage Bankers Association offered some encouraging news late in the week. According to the MBA National Delinquency Survey, the delinquency rate on residential properties fell to 9.47% in the fourth quarter, from 9.64% in the prior quarter. Standard & Poor contradicted the optimistic MBA report, however, and showed that the problems in housing may be far from over.
Based on S&P research, a building “shadow” inventory of delinquent mortgages could take upwards of 3 years to resolve. Roughly 1.75mln homes with a loan value of $473bln will need to be liquidated in the coming years. Loan modifications are providing temporary relief to homeowners, but S&P feels that a disproportionate numbers of these loans will eventually default despite the aid.
Source: Standard & Poor’s Inflation took center stage last week in anticipation of the Consumer and Producer Price Indices.
On Thursday, investors were given a minor jolt by a 1.4% jump in the PPI index, with the core index rising 0.3%. Food and energy prices were the predominant driver behind the headline spike as energy costs were up 5.1% in the month, pushing the YoY increase to 21.5%, levels last seen in mid-2008.
Source: Haver Analytics
At the consumer level, however, inflation proved virtually nonexistent. Headline CPI was up 0.2% and the core index fell 0.1%, posting the largest monthly decline since 1982. As we have mentioned previously, housing costs, which represent roughly 40% of the index, are under immense pressure and will likely remain that way through 2010. Shelter costs declined by 0.5% and owners’ equivalent rent fell 0.1%.
Source: Federal Reserve Bank of Cleveland
This is reining in investors’ expectations of future inflation. At the beginning of January, the 10-year breakeven rate was predicting inflation at 2.5%, but since that time inflation expectations have fallen to 2.3%. Producers are struggling to pass gains through to the consumer level on account of the weak recovery and this trend is unlikely to abate on account of the weak employment markets. The week The economic calendar contains a number of important releases this week. The Case-Shiller Home Price Index on Tuesday is expected to show the smallest year-on-year decline in over two years. That should translate into higher consumer confidence numbers which will also be released on Tuesday. The second estimate of GDP will be announced on Friday with a modest amount of moderation expected. Â
Rumors are abounding that Greece will attempt to raise $4bln-$7bln through a syndicated loan but Greece is denying that such an event will occur. Regardless, Greece will need approximately €17bln in April and May, so it is only a matter of time before that country needs to find a source of funding.Â
On Thursday, the European Parliament holds a special meeting to discuss the economic outlook for the larger member states. Greece will invariably enter the equation. Next Saturday and Sunday, finance officials from the Group of 20 are holding meetings in Incheon, South Korea to talk about the global economic recovery and what lies ahead.
The FDIC Quarterly Banking Profile is expected to be released on Tuesday. With 20 banks having failed already in 2010, this report will contain a number of interesting data points around the health of banks in this country. Source: Barclays Capital
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