Brent Nyitray
Fairlington Blade
Let the mutherfuker burn!
jnc4p
Kevin S. Willis
Michigoose
lmsinca
markinaustin
Arcanaut
novahockey
quarterback
ScottC
yellojktVital Statistics:
| Last | Change | Percent | |
| S&P Futures | 1271.2 | -1.9 | -0.15% |
| Eurostoxx Index | 2324.9 | 9.180 | 0.40% |
| Oil (WTI) | 101.26 | -0.550 | -0.54% |
| US Dollar Index (DXY) | 81.197 | 0.276 | 0.34% |
| US 10 Year Yield | 1.97% | -0.03% | |
| Italy 10 Year Yield | 7.13% | 0.04% |
Jobs Friday. Yesterday’s ADP report did indeed signal a stronger jobs report today. Nonfarm payrolls were up 200k, and Nov was revised down. The unemployment rate dropped to 8.5% from 8.7%. Manufacturing was up 23k, and construction was up 17k. On the service side, retailwas up 28k and transport was up 50k. This could be temp jobs related to the holidays, so take the report with a grain of salt when trying to draw conclusions for the economy as a whole.
I think Scott posted something from James Pethokoukis yesterday regarding Obama’s plan to have the GSEs refinance everyone who is current in their mortgage, no questions asked. The hitch in this plan is the originator. Anyone who originates a conforming mortgage for the GSEs has what is called put-back risk. In other words, if it turns out that the originator had done a poor underwriting, the GSE can force the underwriter to buy it back. And for that reason, no originator is going to refi underwater mortgages or people with dented credit. Even if Obama winks at the originators and says “don’t worry about put-back risk,” I doubt that would be enough comfort, since the rules can always be changed retroactively, and any banker with grey hair will remember the supervisory goodwill fiasco from the S&L crisis. Plus, what is the upside of refinancing an underwater loan for 4.2%? The same as the upside of refinancing a 80% LTV loan for 4.2%. In other words, there is no compensation for taking Obama risk. Which is why it won’t have the effect he hopes it will.
Filed under: Uncategorized |
All Things in Moderation 
nearly everybody, even the administration has now shot down that story. It's just not a workable idea.
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LIBOR dropped today for the first time in ages, after weeks of daily increases. Only .10% for 3month, and it is not entirely clear why, although I am hearing that liquidity is getting better.
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I am seeing signs that the private label mortgages securitization market is opening back up, which is huge.
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Europe is still a big issue of course. I think the payroll tax cut extension is now dead, along with possibly the unemployment benefits.
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BTW…up above I said LIBOR dropped .10%. I meant .1 basis points, which is .001%
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Scott:What does it mean when LIBOR drops?
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Mike:At the moment, hopefully it means that credit markets for the banks are easing up a bit.Starting in the summer, when the Euro crisis started to heat up, European banks began to have some short term funding difficulties. This drove libor up more than 30 basis points, from lows in 3m libor of about .25% all the way up to .5825% earlier this week. The recent dip may be indicating that the European banks, who are contributers to the LIBOR average, are or will be finding short term funding a bit easier.
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Scott:Thanks for the explanation. That's a heck of a rise in the LIBOR over a relatively short time. Do you think this is related to the drop in dollar swap rates that happened a month ago?
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Mike:A more technical explanation, if you are not familiar with what LIBOR actually is:LIBOR is the average of where 18 (I think)global banks report their borrowing costs for various short term maturities – 1wk, 1m, 3m, 6m, 12m – every day. So an increasing libor rate says simply that the cost of bank borrowing is increasing. This can be due to expected or actual fed action on interest rates, ie if the fed is expected to raise rates, libor will go up in line with that expectation. But currently there is no expected fed action on rates. So an increasing libor rate suggests that banks are facing bigger credit spreads. In the case at hand, that is obviously due to the Eurpean crisis. If libor starts to drop, that means that at least some of the member banks are reporting lower borrowing costs, which could be an indication that the crisis is waning.I wouldn't go quite that far yet. But if libor not only stops rising by starts to drop, that is a good sign.
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And now for the big question. Who gets credit for the improving economy, if it sustains itself? The Fed? Obama? The Tea Party?
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@lms… time. booms don't last forever and neither do busts.
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And just because I haven't said this in awhile….reading the comments at the Plumline for the past couple of weeks (I know I shouldn't but I was bored) has really reminded why I grew to hate that place.
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You're no fun Brent. jkI think that's certainly true, although this one sure has been debilitating, but I think the Fed gets a lot of credit, and I'm not a big fan in some cases.
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Scott:I guess I was wondering if the Fed lowering the dollar swap rate by 50 basis points for the ECB was easing borrowing costs for the Euro banks. I think someone (Brent?) posted a WSJ article about how this amounts to sort of a bailout by the Fed of the Euros. So, I wanted to know if the LIBOR dropping was a sign that the bailout was working or if it is something unrelated.
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lms:Who gets credit for the improving economy, if it sustains itself?I blame global warming.
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Mike:I guess I was wondering if the Fed lowering the dollar swap rate by 50 basis points for the ECB was easing borrowing costs for the Euro banks.It's all inter-related, but I think the primary effect of that was not so much on the absolute level of LIBOR, but rather on the cross-currency basis cost of borrowing in, say, Euros and swapping them into dollars. When the program was first introduced, the basis cost of a 1 yr EUR/USD swap was about 90 bps, and my understanding is that it dropped significantly in the first couple days, but has since gone back out. So I'm not sure what kind of effect the Fed swap program is really having.
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I blame global warming.Well, I wish it would heat up the real estate market out here, like it's heated up our winter. We've been hitting the 80's since Christmas. I'm thinking about planting my spring garden already.
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And as both the Plumline saga (don't ask) and the landlord/tenant saga both just got worse……….I need a break to play pogo or get back to work on my bookkeeping. See y'all later.
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" Who gets credit for the improving economy, if it sustains itself?"Credit is probably the wrong term. But if there is a sustained upward trend, 2012 could be like 1984 for the incumbent.
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Thanks for the explanations, Scott. There are so many rates and swaps that I get confused how they all fit together.
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Scott wrote:" When the program was first introduced, the basis cost of a 1 yr EUR/USD swap was about 90 bps, and my understanding is that it dropped significantly in the first couple days, but has since gone back out. So I'm not sure what kind of effect the Fed swap program is really having."Why would not the dollar swap rate have settledat an equilibrium 50 basis points below the previous rate? Does it mean that the traders so would prefer dollars that the rate was bid up?
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Let me also say thanks to, Scott. As for who gets credit, I would guess an improving economy will benefit Obama the most, but I suspect we'll here Republicans say that the economy tanked after Dems took over Congress and bounced back after Republicans took it back (at least the House). I would guess that those in the center would be more likely to credit Obama, but the Republican nominee will be able to make a compelling case. Well, compelling to those who feel the need to credit one person or one party over the other rather than say…global warming.
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Mark:Why would not the dollar swap rate have settled at an equilibrium 50 basis points below the previous rate?Two things to note on this. First, the fed currency swaps exist strictly between the fed and other central banks, so that the other central banks can provide $ liquidity to their own banks on whatever terms are within their mandate. There exists, apart from this, a much larger basis swap market between banks themselves, where most banks normally get $ liquidity, borrowing local currency in the market and swapping it into dollars.Second, the fed swap lines are for maturities between 1 day to 3 months. Market basis swaps generally range from 3 months to 30 years.For these two reasons, there is no necessary correlation between the cost of market basis swaps between two banks, and basis swaps between the fed and other central banks. For example, the 90 bp spread I spoke of earlier was for a 1 yr EUR/USD swap in the market. The fed is not swapping directly in the market, and is doing so for a much shorter term than 1 year, so the 1yr basis will not necessarily revert to the fed swap line cost. One would generally expect that if the fed swap line facility was truly alleviating any liquidity concerns, the market basis, even for longer maturities, would tend towards the swap level set by the fed. And in the immediate days after the fed's announcement, the market basis did indeed drop significantly. But it has since widened back out beyond 3 months, indicating to me that the fed/central bank facility has not had much of an impact on longer term liquidity concerns.
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Mike:There are so many rates and swaps that I get confused how they all fit together. So do I, believe me.
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Thanks, Scott.
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"European Banks Stash Extra Cash With Central Bank Figures released on Friday showed that the European Central Bank had received 455 billion euros, or $578 billion, of overnight deposits from European banks, the highest figure since the euro zone was created in 1999."Significance? I would think more business activity in the private sector. When the southern tier of Fed Reserve Banks get an influx of Mexican cash before the MX elections it is because the wealthy in MX have moved big bucks into American banks in TX and CA.But I do not see how that phenomenon translates to Europe. One of my old friends is a senior economist at the Fed in Dallas and has written on the MX $$$ issue.
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