All Things in Moderation

Markets are flattish as global currency markets continue to digest the move by the Swiss National Bank to remove the cap on the franc. While that isn’t of great importance to US investors, it is important to Euro bond investors, and they are the ones leading the parade these days. Bonds and MBS are down small.

Consumer Price inflation fell in December by .4% due to lower energy prices. Ex food and energy, the index was flat.

More evidence the economy slowed in December: Industrial Production fell .1% and Capacity Utilization fell to 79.7% from a downward-revised 80%.

The surprise move by the SNB to eliminate the cap on the franc has caused issues at some broker-dealers that specialize in foreign exchange. People have gotten absolutely blown up in the swiss / euro pair, and some firms (heard FXCM is one) are having capital issues. This is the sort of thing that could snowball, and begin to affect credit markets in the US, but I don’t really anticipate it. Just something to keep an eye on. Fun fact: The yield on the Swiss 10 year bond is negative 2 basis points. For the low, low price of only 2 basis points per year, you get the privilege of letting the Swiss Government borrow your money for 10 years. Don’t believe me? Look:

The ECB is scheduled to meet next Thursday morning and the market are expecting a big announcement regarding QE. Bond markets have priced in A LOT of optimism regarding this event, and if it disappoints, or even comes in as expected, we could see a reversal in interest rates. LOs, this is one thing you should tell any borrowers that are on the fence. These low rates could disappear as quickly as they appeared. There is an old saw in the markets that says “Buy the rumor, sell the fact.” In this case, it means that the move in interest rates may have preceded the event, and the move could reverse afterward. Not necessarily forecasting this is going to happen, but the setup for it looks good.

Lennar reported good earnings yesterday, but the stock was slammed 7% on future margin guidance. We have heard the same thing from Toll and KB Home as well – it is getting hard to raise prices and incentives are increasing. The big price appreciation in new home construction appears to be over. This will probably spill over into existing homes as well. Part of this isn’t all bad news – it also reflects a shift to the lower price points (read starter homes). They may have lower margins, but you can sell a lot more starter homes than you can sell McMansions. The builders are setting themselves up for the return of the first time homebuyer. Given the behavior of the XHB lately, the seasonal “hope springs eternal” trade that lasts from Thanksgiving to New Years appears to be unwinding.