American Express, Bank of America and other lenders have seen their consumer-delinquency rate decline, which might lead to more loans and an increase in economic growth. Economist Stephen Stanley said in a Bloomberg report the development might weaken the Federal Reserve’s commitment to keep interest rates low for an “extended period,” at least once the European sovereign-debt crisis is no longer seen as a threat.
Federal Reserve Board Chairman Ben Bernanke, in a May 6 speech in Chicago, said bankers’ attitudes on lending “may be shifting,” citing as “reasons for optimism” the economic recovery and expectations among senior loan officers for a “modest reduction” in troubled loans. The comments were overshadowed by that day’s 9.2 percent intraday plunge in the Dow Jones Industrial Average, which was sparked in part by concerns about euro-zone defaults.
The European debt crisis will not likely fade from memory that quickly, and several “aftershocks” in the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) countries will likely keep pressure on credit markets, forcing the Fed and other central banks to work to ensure market liquidity remains at sustainable levels. It is this combination that has led Trafalgar Investment Advisers LLC to believe that U.S.-oriented companies will benefit most in the near-term, as the U.S. economic recovery pushes along due to low interest rates and low inflation, while Europe struggles. Any move by the Fed to raise rates will likely occur in early 2011. One move the Fed may make in the interim is to raise the discount rate, which the rate charged by the Federal Reserve for overnight loans to financial institutions, another quarter- or half-percentage point, but the target federal funds rate (which can affect all types of business and consumer loan interest rates) will most likely remain in the range between 0 and 0.25.
The minutes of the Federal Open Market Committee’s (FOMC’s) April 2010 meeting show that committee members generally believed that the economy was recovering, but needed the continued assistance of very low interest rates. The usual dissenter, Thomas Hoenig, wanted to raise the federal funds target rate immediately to 1 percent from the current range of 0 to 0.25 percent.
Participants expected that economic growth would continue: Recent data pointed to significant gains in retail sales, business spending on equipment and software had picked up substantially, and reports from business contacts and regional surveys indicated that production was increasing briskly in many sectors. Participants agreed that the growth in real GDP appeared to reflect a strengthening of private final demand and not just fiscal stimulus and a slower pace of inventory decumulation; this welcome development lessened policymakers’ concerns about the economy’s ability to maintain a self-sustaining recovery without government support. Businesses appeared to be gaining confidence in the economic recovery, and narrowing credit spreads in private debt markets were allowing low policy rates to be reflected more fully in the cost of capital. At the same time, rising stock prices and the apparent stabilization of house prices were helping to repair household balance sheets. As a result, consumers and firms were beginning to satisfy demands for durable goods and capital equipment that had been postponed during the economic downturn. Many participants noted that employment had increased in recent months, and that they expected a further firming of labor market conditions going forward. A stronger labor market could continue to boost consumer and business confidence and so contribute to further gains in spending.
It is interesting to note the members’ view that business confidence is tied to the narrowing of credit spreads in private debt markets. Since the meeting, the havoc in Europe has caused credit spreads to spike higher. That alone would explain the panic in equity markets. Such panic may turn into a full-on market crash if Europe does not make more moves to restore confidence – their usual bickering and in-fighting is no longer amusing. Should Europe be able to restore some confidence in credit markets, look for equity markets to head higher.
To view the full set of FOMC minutes, please click on the following link: FOMC Minutes April 2010.
Data through March 2010, released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices show that the U.S. National Home Price Index fell 3.2 percent in the first quarter of 2010, but remains above its year-earlier level. However, the comparison is to an absolutely horrible year last year, so a 3.2 percent increase from that level does not indicate much strength in housing. In March, 13 of the 20 cities covered by S&P/Case-Shiller Home Price Indices and both monthly composites were down, although the two composites and 10-city index showed year-over-year gains. Housing prices rebounded from crisis lows, but recently have seen renewed weakness as tax incentives are ending and foreclosures are climbing.
Detroit was down the most (-4.10 percent), followed by Minneapolis (-2.70 percent), and Chicago (-2.33 percent). Only six cities saw month-over-month increases from February to March—Seattle, Dallas, Denver, Cleveland, San Diego, and San Francisco. The 10-city index was up 3.16 percent from 3/09 to 3/10. The 20-city index was up 2.36 percent.
San Francisco and San Diego have made nice comebacks over the last year, both gaining more than 10 percent. DC, LA, Minneapolis, and Cleveland are all up more than 5 percent over the last year as well. Las Vegas continues to have the weakest year-over-year numbers, but it has come back from -30 percent readings to its current level of -11.90 percent.
For more information, please click on the “Housing Statistics” page on the menu bar at the top of the blog.
Four of Spain’s “cajas” submitted a merger proposal to the Spanish central bank. The combination would create Spain’s fifth-largest financial group, with assets of more than €135 billion ($167 billion). The Bank of Spain has been encouraging such mergers as it tries to shore up troubled lenders. “Many of them are half bankrupt,” Rafael Pampillon, head of economic analysis at IE Business School, said in reference to Spain’s regional savings banks. “They have loans to property developers and mortgages that have turned toxic, and by mixing them with other savings banks the risk is diluted.”
Stress in Spain’s banking system signals an increasing risk that European governments may struggle to control fallout from the Greek debt crisis, said Mohamed A. El-Erian, co-chief investment officer at Pacific Investment Management Co., manager of the world’s biggest bond mutual fund.
“Banks have a way of amplifying shocks in the system,” El-Erian said in an interview with PBS’s Nightly Business Report posted on the U.S. public broadcaster’s website. “The minute you introduce strains in the banking system, there’s always a fear that governments will be behind the curve and that you can get contagion.”
For more, please click on the following link to a Bloomberg report: Spanish banks with $167 in assets to combine.
That fear is hammering stock markets around the world today. With fear and destruction comes opportunity, however.
![before the second collision [EXPLORED]](http://static.flickr.com/4085/4967941658_a1e665797c_t.jpg "before the second collision [EXPLORED]")
