Week in Review: Demand for European bonds slides; U.S. deficit talks fail
Bond demand drops in Germany
- Portuguese, Hungarian debt downgraded
- U.S. durable goods orders down
- U.S. initial jobless claims below 400,000
- Chinese manufacturing activity shrinks
In a particularly difficult week for markets, U.S. and global stocks continued to slide and the euro tumbled, while yields on European government-issued bonds soared. The market slide reflected darkening prospects for the global economy and a growing sense of pessimism regarding the European debt crisis as demand fell for any European government bonds, including those issued by Germany. Meanwhile, the impact of global economic struggles spread to China, with a report of declining manufacturing activity in the world’s second largest economy.
U.S. economic news was largely negative for the week. Third-quarter economic growth estimates were lowered, durable goods orders fell, and first-time unemployment insurance applications rose slightly. Perhaps of greatest concern was the failure of the U.S. Congress’ bipartisan deficit panel to agree to $1.2 trillion in cuts to government spending over the next decade, adding to a sense of frustration and disappointment in the effectiveness of the federal government at a critical economic time.
Stock markets in the U.S. closed at 1 p.m on Friday. The bond market closed at 2 p.m.
BofA receives U.S. government warning
The U.S. government reportedly warned Bank of America’s board that the nation’s second-largest lender could face a public enforcement action if regulators aren’t satisfied with steps taken to strengthen the bank following its 2009 acquisition of securities firm Merrill Lynch & Co. Issues to be addressed include governance, risk, and liquidity management.
U.S. and global economic news
German bond demand falters
The relatively strong German bond had difficulty attracting investors in an auction on Wednesday, as bond buyers grew more concerned about rising European debt risks. Of key concern in Germany was the fear that Europe’s strongest economy might have to accept the adoption of common European bonds as a solution to the debt crisis. That would force the country to share default risks with weaker Eurozone members and increase Germany’s borrowing costs.
Italian yields soar
The clearest reflection of perceived bond risk is rising yields. Italy’s two-year and five-year government bond yields hit euro-era highs of 7.7% and 7.8%, respectively, on Friday, as the Italian government was forced to pay dearly to attract investors. This, in turn, raises more concern over next week’s auction of longer-term bonds as Italy, France, Belgium, and Spain will all compete for investors.
Portuguese, Hungarian debt downgraded to junk bond status
In separate assessments, credit ratings for Portugal and Hungary dropped into junk bond territory. Fitch Ratings lowered its rating for Portugal government debt to BB+ from BBB+ and maintained a negative outlook. Moody’s Investors Service cut Hungary’s credit rating to Ba1 from Baa3 and will continue reviewing the country’s economic stability for further potential downgrades.
Eurozone economy headed for contraction
Purchasing managers in Europe are expecting an economic decline, according to the latest composite purchasing-managers index (PMI) published by Markit Economics. The Eurozone PMI fell to 46.5 in November from 47.2 in October. Any reading below 50 indicates economic contraction.
Confidence levels rise in Germany, Italy, fall in France
German business confidence rose unexpectedly in November, following four consecutive months of decline, according to Germany’s Ifo research institute. In Italy, consumer confidence also rose in November, signaling relief and optimism over the establishment of a new government. In France, however, consumer confidence plunged in November, as consumers expressed concern about their personal financial prospects, capacity to save, and future living standards, according to an INSEE survey.
U.S. economy growing at slower pace than first thought
The U.S. gross domestic product grew at an inflation-adjusted annual rate of just 2.0% in the third quarter, according to the U.S. Department of Commerce’s second estimate of quarterly GDP, which was down from its original estimate of 2.5%.
U.S. durable goods orders fall
Manufacturers’ goods built to last at least three years fell by 0.7% in September from October, the U.S. Commerce Department reported. New orders of non-defense capital goods excluding aircraft, a key gauge of business confidence, fell 1.8% from the previous month.
U.S. jobless claims slightly higher
Weekly initial jobless claims rose by 2,000 to a seasonally adjusted 393,000 for the week ended November 19, according to the U.S. Department of Labor. The four-week claims average, a better gauge of overall labor market strength, fell by 3,250 to 394,250. Any new jobless claims figure below 400,000 is seen as a potentially healthy sign for the overall economy.
Chinese manufacturing gauge falls
The preliminary HSBC China Manufacturing Purchasing Managers’ Index, reflecting the level of manufacturing activity in the world’s second-largest economy, fell to a reading of 48 in November, down from 51 in October. A drop below 50 indicates a contracting economy.
U.S. and global corporate news
Deere profits leap
Deere & Company’s profits jumped by 46% in its fiscal fourth quarter on stronger sales volume and pricing. The world’s largest farm machinery manufacturer projects profits of $3.2 billion for its new fiscal year, ahead of the $2.92 billion forecast by analysts polled by Thomson Reuters.
HP misses earnings estimates
PC manufacturer Hewlett-Packard expects to miss analysts’ earnings estimates for its first fiscal quarter ending in January.
Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times; Forbes.com; CNNMoney.com; msnbc.com. The Wall Street Journal Digital News
This is not a loan commitment. Programs are subject to change without notice and are only available to qualified borrowers. Underwriting terms and some restrictions may apply.The week ahead
- Four Canadian banks report earnings –– TD Bank, Canadian Imperial Bank of Commerce, Royal Bank of Canada, and Bank of Nova Scotia.
- The Chicago PMI is released on Wednesday, November 30.
- The ADP monthly employment report is released on Wednesday, November 30.
- The European PMI Manufacturing report is released Thursday, December 1.
- The monthly U.S. nonfarm payroll report is released on Friday, December 2.
Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times; Forbes.com; CNNMoney.com; msnbc.com.
This is not a loan commitment. Programs are subject to change without notice and are only available to qualified borrowers. Underwriting terms and some restrictions may apply. Mortgage refi plan targets hard-hit borrowers
The Home Affordable Refinance Program, the only program specifically designed for owners whose mortgages are worth more than the value of their homes, is being changed so that more Fannie Mae- or Freddie Mac-guaranteed mortgages could be refinanced.
Use external link to see if Fannie Mae has guaranteed your mortgage. Use external link to see if Freddie Mac has guaranteed your mortgage. With house prices nationally roughly a third below their peak, there are millions of borrowers who will potentially be eligible to refinance into mortgages near record lows — the 30-year carried an interest rate of 4.11% last week — rather than the mere 894,000 borrowers who have used the program so far.
“These are important steps that will help more homeowners refinance at lower rates, save consumers money and help get folks spending again,” Obama is due to tell an audience in Las Vegas, the city with the highest foreclosure rate in the country. Nevada is the only state which cumulatively is underwater on mortgages.
The new plan does have its limitations: it will require homeowners to be current on their payments and it’s only for loans sold to Fannie or Freddie by May 31, 2009. And of course, not all loans are backed by the housing giants, though state attorneys-general are separately negotiating a settlement with the nation’s top lenders that may include an element of mortgage modification.
“Given the magnitude of the housing bubble, and the huge inventory of unsold homes in places like Nevada, it will take time to solve these challenges,” Obama admitted, according to prepared remarks.
Regulator for Fannie Mae and Freddie Mac, estimates that refinancing could double under the program. Even so, the program would go only a small way in addressing the roughly 11 million homeowners who are underwater.
To spark interest in HARP, the program will lower fees, eliminate the current 125% loan-to-value ceiling, waive lender warranties and eliminate the need for property appraisals.
White House officials say the refinancing could save owners about $2,500 each year.
Gene Sperling, the director of the National Economic Council, said the key element of the plan is the removal of reps and warranties. “Removing reps and warranties has the potential to unleash competition for housing refinance,” Sperling told reporters on a call.
The industry embraced the initiative.
“Lenders are particularly gratified that the refinements will provide relief from some representations and warranties that lenders face when originating new loans,” said David Stevens, president and chief executive of the Mortgage Bankers Association. “These changes alone should encourage lenders to more actively participate in HARP.”
He cautioned that “it will take a bit of additional time” even after FHFA guidelines are introduced in November to implement them.
Politically, the plan is the start of a once-a-week effort to show the Obama administration can get things done even when legislative efforts are blocked in Congress, according to the New York Times.
For the economy as a whole, the program is seen having only a limited impact.
Yelena Shulyatyeva, an economist at BNP Paribas, calculates that the program could leave to savings on the order of $2.75 billion — or 0.02% of annual disposable income.
While the households that benefit will see an increase in disposable income of as much as 5% as a result of lower mortgage payments, in the aggregate, the direct impact is not material from a macroeconomic point of view,” she said in a note to clients.
“This would hold even if the program is more successful than the FHFA anticipates. Nevertheless, indirect benefits of the plan include further lowering delinquency rates and alleviating bank losses to a modest degree.”
Steve Goldstein is MarketWatch's Washington bureau chief.