Morning Report: Brexit panic over? 6/29/16

Stocks are higher this morning as global stocks and commodities rally. Bonds and MBS are flat.

It seems like the big Brexit-related sell-off might be over.  Brexit will have a negligible effect on US corporate earnings, and stocks will benefit from a lower, steadier interest rate environment. I would look for the correlation between US stocks and global stocks to break down gradually. I am not sure we will see the same effect in the Treasury markets as the global bond market is simply much more integrated. Speaking of which, global bond yields are holding steady this morning, with the German Bund at -11 basis points and the the PIIGS slightly lower.

First quarter GDP was revised to +1.1%. while personal consumption came in at 1.5% and the PCE index (the inflation measure preferred by the Fed came in at 0.4%). Housing as a percentage of GDP increased. I have long said the difference between this sub-par economy and a strong one is housing. Politicians have yet to figure this out.

Home prices rose .5% MOM and 5.4%YOY, according to the Case-Shiller home price index. Home prices in 7 MSAs (Denver, Dallas, Portland OR, San Francisco, Seattle, Charlotte, and Boston) have eclipsed their 2006 peaks.

Personal Incomes rose 0.2% in May, slightly below forecasts, while personal spending increased 0.4%, right in line with expectations. For the month, the PCE core index rose 1.6% YOY, which is still below the Fed’s target of 2%.

Mortgage Applications fell 2.6% last week as purchases fell 3% and refis fell 2.4%. Pending Home Sales fell 3.7% MOM in May and are up 2.4% YOY.

The Fed is scheduled to release the results of its stress tests for the largest US banks. The results should come out after the close. Billions of dollars in dividends and buybacks are on the line. Separately, GE’s systemic designation has been rescinded by US regulators. GE is the first institution to have the designation removed, which requires stringent capital and leverage requirements. GE has sold much of its GE Financial division, and has returned to its roots as an industrial manufacturer.

Speaking of banking crises, the European big banks have stabilized in the aftermath of Brexit. The canaries in the coal mine are Deutsche Bank and Unicredito. Even Barclay’s and RBS have stabilized. The thing to keep in mind is that the banks now have almost double the capital they had in 2008 and Brexit is nothing like the bursting of the US residential real estate bubble. The Bernank agrees.

Freddie Mac wonders if the homeownership rate can fall below 50%. The current level is at 63.5%, which is the lowest in 22 years, and just off the low of 63%, which goes back to 1965, when Census started tracking the statistic. They look at 3 studies, which all predict lower homeownership going forward. The factors inhibiting an increase in homeownership are lower income growth, high rental prices, tight supply and and high student loan debt / tight credit. It is hard to tell what a “normal” homeownership rate as the 2005 spike was the result of a bubble and a lot of social engineering via the housing market, which really started early in the Clinton Administration.

26 Responses

  1. We all thought the financial market effect would be short lived. No surprise here.

    Liked by 1 person

  2. Folks predicting Brexit apocalypse might be surprised.


  3. @jnc4p: “But hey, glad to see you can still contribute at your level.”

    damn, son.


    • I replied at the appropriate level of the remark that I was responding to.

      The “Republitarians are idiots/frauds/racists, etc” spam is only slightly less tiresome than Cons sock puppet spam.

      Liked by 1 person

  4. Interesting take on the purpose of America:

    “”This is the fight. This is absolutely the fight as demographic change helps America fulfill its destiny as a people,” McGhee says. “We can either say we’re meeting here to compete with one another, or all the world’s people are meeting here to give lie to the idea of racial difference.””



    maybe someone else can figure out how to post the image.


  6. Excellent explanation of all the caterwauling out of the left on Brexit:


  7. The usual just in time vote after a bunch of brinksmanship

    “A Vote to Save Puerto Rico From Default

    A bipartisan coalition in the U.S. Senate advanced legislation just in time to allow the island territory to make a July 1 payment and restructure its $70 billion debt.

    Puerto Rico appears likely to be able to stave off a default on $2 billion in bond payments due Friday after the U.S. Senate advanced legislation allowing the island territory to restructure its debt.

    An unusual, bipartisan coalition of senators pushed the PROMESA Act past the needed 60-vote threshold to break a filibuster, allowing for a final vote on the measure in advance of the July 1 deadline. The bill, which has already cleared the House, would go to President Obama for his signature. The tally on Wednesday was 68-32, as support from leaders of both parties overcame opposition from liberals like Senators Bernie Sanders and Elizabeth Warren as well as conservative Senators Ted Cruz and Tom Cotton. The Senate must still hold one more vote on final passage of the Puerto Rico measure, but Wednesday’s procedural action all but assures its success.”

    Also worth noting:

    “Puerto Ricans use credit unions in high numbers. A letter to Senate Energy and Natural Resources Committee Chair and PROMESA bill sponsor Lisa Murkowski from Sosa Lloréns Cruz Neris, a Puerto Rican law firm, claims that 1.2 million people have either deposits or loans with credit unions, representing over one in three residents. State-chartered credit unions hold $8.47 billion in assets.

    By local law, these state-chartered credit unions must hold Puerto Rican debt as part of their regulatory capital. In fact, the government demanded that credit unions increase their holdings in Puerto Rican bonds in 2009, limiting other options for their capital. So if a post-PROMESA debt restructuring forces haircuts equally on all creditors, that will wither the capital for these credit unions, putting many at risk of insolvency.

    That doesn’t mean that 1.2 million depositors would lose their money; Puerto Rican credit unions are protected by a deposit insurance system. But it does mean that the collapse would freeze local lending, precisely the outcome PROMESA purports to prevent, if the goal is to rescue the island’s economy. That includes personal loans, and the majority of Puerto Rico’s credit union customers are low- to middle-income families and senior citizens. The island’s economy is already in bad enough shape. According to the credit unions, PROMESA would not only stunt it further, but also put the burden on the most vulnerable members of society.”

    Liked by 1 person

  8. I really despise Sanders now. In the case of Puerto Rico, he’s pretty much come straight out for setting creditor repayment priority in bankruptcy based on politics:

    “The credit unions endorsed the plan of a separate bill, put forward by Vermont senator and presidential candidate Bernie Sanders. The Sanders plan sets up a third-party corporation to purchase Puerto Rican debt, becoming the sole creditor for the island, able to rework terms for a resolution. But there’s one unique feature to the proposal: The third-party corporation only pays out the price of the bond paid for by each creditor.

    Many so-called “vulture funds” scooped up Puerto Rican debt in the secondary market at fire sale prices. They sought a quick payday by buying in low and seeking to force full repayment of the face value of the bonds. The Sanders bill refuses to reward this profit-making scheme, paying back only what was paid in the first place. So vulture funds that paid 20 cents on every dollar of face value for bonds would only get 20 cents on the dollar back.

    This would also protect primary market investors, like mutual funds and the credit unions, who bought Puerto Rican debt at its face value years ago. They would not suffer in the same way that they would with a blanket haircut imposed by PROMESA’s oversight board. Instead of rewarding vulture funds for their opportunism and hurting traditional investors — including Puerto Rican citizens — the Sanders approach would allocate available funds more equitably.

    Sosa Lloréns Cruz Neris calls this the “Entry Point” solution, and they argue that through this approach, “the goals of an effective debt restructuring can be achieved, treating investors fairly and without hurting Puerto Rico’s economy.” Since vulture funds have re-run this strategy around the world, from Argentina to Greece to Detroit, and would surely target more U.S. municipalities if they got the chance, instituting the Entry Point principle would “prevent instances of unjust enrichment in the context of public distress,” Sosa Lloréns Cruz Neris concludes.”

    Liked by 1 person

    • In fact, this seems to be an almost Trump like approach to “negotiating” government debt repayment:

      “Calling for investors to take “a massive haircut,” Sanders proposes an independent audit of Puerto Rico’s debt with an eye toward repudiating any of it found to be unconstitutional.

      This position is dangerous for the health of the municipal bond market and thus the ability of states and local governments to borrow at reasonable costs. If the response to a government’s financial difficulties is a search for irregularities in its bond documents with the goal of setting aside as many as possible, investors will shy away from the market and issuers will be obliged to pay extra for more rounds of due diligence.”


    • obama did the same thing in the GM bail-out “bankruptcy.” He didn’t want some plain old bankruptcy judge determining who gets what.

      Liked by 1 person

  9. ESPN’s First Take is now 5 women… Wonder who thought this would be a good idea… I cannot fathom what Disney is thinking unless some feminist group has them by the balls.

    Liked by 1 person

  10. Now this is how you do rent seeking. And put up barriers to trade. Well played


    • “As a result, from now on, catfish and a few other species of fish will be inspected by the U.S. Department of Agriculture’s Food Safety and Inspection Service rather than by the Food and Drug Administration’s seafood inspection program. All other seafood will continue to be inspected by the FDA.”

      And of course there’s no reason why two different agencies should be doing food inspections.

      But of course eliminating any government agencies is just anarchism with the end goal of Somalia.


      • Catfish are [mainly] NOT seafood, obviously. Most of them are grown on catfish FARMS, in Texas stocked by State P&W, from State hatcheries near Austin. And lakes are stocked for sport fishing by the State hatcheries, too.

        See? Method in the madness is based on whether the fish are seafood or farm fish.


        • Mark:

          See? Method in the madness is based on whether the fish are seafood or farm fish.

          I am struggling to determine whether you are being facetious or serious.


        • Facetious.

          Having grown up on a farm, I can tell you that the USDA continuously inspected dairies, slaughterhouses, and the like 65 years ago. All land grant colleges had Ag schools, whose labs were available to County Agents, so that if a disease was suspected by a farmer or rancher he could take a dead animal or sample wheat or corn to the County Agent and NC St. or Rutgers or TX A&M or Cornell or Mich St or Maryland or Penn State or UC Davis or Iowa State or wherever you were would have a full report back in no time.

          Well, the FDA always did seafood because seafood is not plugged into the whole county agent land grant university system that operates well for the American meat and grain industries. Unlike USDA, FDA does not have this huge nation wide testing apparatus and generally as I recall the US Fish hatchery teams do the front end assessments of fish farms that USDA does for meat and grain. Then when a contaminated fish is reported that leads to an FDA test. So the fish system is less intrusive and less rigorous than the farm/ranch system. And everyone was OK with that b/c farmers and ranchers need the access to the county agents but fisheries just don’t.

          Thus the rentseeking aspect of Cochran’s move – which also has the effect of slamming any imports of catfish with red tape. So this is something on review that Congress and POTUS agree about and if they would just get to work a little bit during an election year they could reverse Cochran’s BS plan.


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