Housing Starts

• China cash crunch deepens as PBOC withholds funding (FT), just a week behind ZH
• Platts in hot manipulated crude again: Traders Try to Game Platts Oil-Price Benchmarks (WSJ)
• Kabul Suspends Security Talks With U.S., jeopardizing plans to maintain a U.S. military presence (WSJ)
• Afghan government irked over U.S. talks with Taliban (Reuters)
• BOJ Kuroda: BOJ to Adjust Policy If Japan Econ Changes (MNI)
• Google Considering Private-Equity Alliances (BBG)
• Korean Air Buying 747-8s to End Boeing’s Sales Drought (BBG)
• Syria's Islamists seize control as moderates dither (Reuters)
• SEC considers policy shift on admissions of wrongdoing (FT)
• U.K. Banker Bonuses Face Decade Delays in Industry Overhaul (BBG)

Hedonically-adjusted inflation is in check, and the housing "recovery" is in doubt: the perfect cocktail for Bernanke to announce no tapering... Or to shock the world and in just over 24 hours say that as we prepares to wave bon voyage he will start to reduce the liquidity injection into the markets as he has been warning for the past 3 months.

There was non-Fed news in the overnight market. Such as Nikkei reporting that Germany's Angela Merkel was the first G-8 member to be openly critical of Japan's credit-easing policy "that has led to the yen's weakening against major currencies" in what was the first shot across the bow between the two export-heavy countries. Not helping risk in Asia was also news that China May new home prices rose in 69 cities over the past year, compared to 68 the prior month, thus keeping the PBOC's hands tied even as the liquidity shortage in traditional liquidity conduits continues to cripple the banking system and forcing the Agricultural Development Bank of China to scale back the size of two bond offerings today by 31% "as the worst cash crunch in at least seven years curbs demand for the securities." Rounding up Asia were the latest RBA meeting minutes which noted the possibility of further weakness in AUD over time, adding downside pressure on the currency and pressuring all AUD linked equity pairs lower. Still, the USDJPY caught a late bid pushing it above 95 on some comments by the economy minister Amari who said that the government would not be swayed by day-to-day market moves and the BOJ "should continue making efforts to convey its thinking to markets" adding the government was not making policy to pander to markets, confirming that Japan is making policy solely to pander to markets.

In the week ahead, we get the usual middle-of-the-month batch of early business surveys, including the New York Empire, Philly Fed and Eurozone Flash PMIs. The second key focus will be a number of important monetary policy meetings, including the FOMC, as well as the Swiss, Norwegian Turkish and Indian policy decisions. The latter two are particularly interesting in the light of the recent EM weakness. The main event this weak will be the FOMC meeting after the recent market focus on the timing of tapering of the QE3 program. Swings in bond markets related to the FOMC meeting could be the primary source of FX volatility this week.

First it was the "most important" payroll print in years, then the "most important" retail sales number, and now we are just days ahead of the "most important" FOMC statement in years as well, as the fate of the centrally-planned markets lies in the hands of Bernanke's decision to taper, or not to taper. The main catalyst for now still appears to be an ongoing wrong interpretation of Hilsenrath's Thursday blog post in which some still see reaffirmation by the Fed that it won't taper, when all the Fed's mouthpiece said is that the short-end would be anchored even as the long-end is allowed to rise. Looking at the well-known no volume levitation futures action, which in the overnight session has wiped out all of Friday's losses and then some simply due to a 2.73% rise in the Nikkei overnight back above 13,000 driven by the USDJPY briefly regaining 95.00, the market has made up its mind (if only for the time being) that whatever decision the Fed takes regarding the monthly level of liquidity injection is a bullish one. At least until it changes its mind next.

• S&P Revises U.S. Credit Outlook To "Stable" From Negative

• Fed's Bullard Details How QE Can Be Cut

• Fed Retreat From Bond Buying Expected By Fourth Quarter - Poll

• U.S., Japan Leading Recovery In Major Economies - OECD

Preview of tomorrow's Bernanke testimony and FOMC minutes.

While we have wondered on numerous occasions previously if the collapse in lumber prices is the far more accurate indicator of end demand for housing (as confirmed by the recent collapse in multi-family housing starts), perhaps an even better indicator of trends in housing (and by implication the broader economy) is private sector intermediate end demand, such as Caterpillar North America sales, which unlike government data, are far less subject to political intervention, interpolation, guesswork, seasonal adjustments and otherwise, general manipulation. And even though we have previously reported on the woes ailing the world's largest seller of bulldozers, excavators and wheel loaders, such focus was primarily targeted in the offshore markets, and especially China (the abysmal European market needs no mention). So maybe the time has come to shift attention to the US, where as Caterpillar just reported, not only are all foreign markets still trending at several impacted levels, but where US machine retail sales just saw the biggest tumble in three years, falling 18% Y/Y: the most since early 2010. What is more disturbing is that CAT equipment is used in far-broader economic activities than merely housing, and likely is a far more accurate indicator of true industrial end-demand than any other number cherry-picked by the government.

Fed chairman Ben Bernanke’s testimony to Congress will be important in setting the tone for the markets (particularly the dollar, equities and US treasuries), as traders hunt for clues on when the Fed is likely to ease its rate of asset purchases.

Is a $400,000 house with NINJA loan normal? How about a $200,000 REO with missing appliances, a dead yard, a long list of maintenance and no financing? Maybe normal is a $300,000 flip after the flipper fixed everything and colored up the yard, and did some upgrades to the interior. Some may suggest that normal is more like a $300,000 sale with a 5.5% fixed rate and 20% down. Then again, it may be more normal if this $300,000 sale is financed with a 3.5% down FHA loan at 4%. Of course, all of the above is actually referring to the same house. So what is normal? At the moment, we know prices are going up in certain markets, and so are sales. Mortgage rates are higher now than when QE3 started in September 2012. Investors are gobbling up everything in sight in their favored target markets. As an example, they are buying 30% of the houses in Southern California, 38% in Phoenix and 53% in Vegas. First time buyers do not stand a chance. The percentage of home ownership is declining. Are policy makers happy with these results? Are these intended or unintended consequences of public policies?

Succinctly summarizing the positive and negative news, data, and market events of the week...

Those hoping for a slew of negative news to push stocks much higher today will be disappointed in this largely catalyst-free day. So far today we have gotten only the ECB's weekly 3y LTRO announcement whereby seven banks will repay a total of €1.1 billion from both LTRO issues, as repayments slow to a trickle because the last thing the ECB, which was rumored to be inquiring banks if they can handle negative deposit rates earlier in the session, needs is even more balance sheet contraction. The biggest economic European economic data point was the EU construction output which contracted for a fifth consecutive month, dropping -1.7% compared to -0.3% previously, and tumbled 7.9% from a year before.  Elsewhere, Spain announced trade data for March, which printed at yet another surplus of €0.63 billion, prompted not so much by soaring exports which rose a tiny 2% from a year ago to €20.3 billion but due to a collapse in imports of 15% to €19.7 billion - a further sign that the Spanish economy is truly contracting even if the ultimate accounting entry will be GDP positive. More importantly for Spain, the country reported a March bad loan ratio - which has been persistently underreproted - at 10.5% up from 10.4% in February. We will have more to say on why this is the latest and greatest ticking timebomb for the Eurozone shortly.

It is no secret that in addition to the well-known phenomenon of "foreclosure stuffing", one of the primary drivers of the artificial housing "recovery" has been the surge of hedge funds and asset managers into purchases of rental units courtesy of near-zero cost REO-to-rent federal lending facilities, which have taken out distressed inventory from the market in hopes of converting it into rental. This has manifested in a surge in multi-family starts which have been the primary driver behind the rise of housing starts in the past several years, even with single-family units barely moving higher. All this despite Och Ziff making the case loud and clear late last year, that the days of profitability of this strategy have come and gone. Today we got the first confirmation that other asset managers may have finally given up on the rental conversion strategy, following the observed collapse in multi-family housing starts which crashed from 376K to 234K in April (the lowest since last summer), a drop of 142K and the worst monthly drop since 2006 when the housing market had once again peaked and was about to undergo a very serious correction.

We didn't really need a confirmation that the economy was deteriorating and completely disconnected from the "market", but we got it nonetheless. First, Initial Claims coming at 360K, on expectations of 330K, the worst print and worst miss in six weeks, confirming that weekly data is largely noise and that there is no sustainable downward trend. The May 11 weekly print adjusted and unadjusted were 360K and 318K respectively, virtually unchanged from a year ago at 373K and 325K, showing that in one year there has been essentially no progress, and that weekly initial claims of 350K is the new normal. Of course, the last week's print was also revised higher from 323K to 328K, while initial claims also missed expectations of a round 3MM print, instead printing at 3009K.

In a world in which fundamentals no longer drive risk prices (that task is left to central banks, and HFT stop hunts and momentum ignition patterns) or anything for that matter, it only makes sense that the day on which Japan posted a better than expected annualized, adjusted Q1 GDP of 3.5% compared to the expected 2.7% that the Nikkei would be down, following days of relentless surges higher. Of course, Japan's GDP wasn't really the stellar result many portrayed it to be, with the sequential rise coming in at 0.9%, just modestly higher than the 0.7% expected, although when reporting actual, nominal figures, it was up by just 0.4%, or below the 0.5% expected, meaning the entire annualized beat came from the gratuitous fudging of the deflator which was far lower than the -0.9% expected at -1.2%: so higher than expected deflation leading to an adjustment which implies more inflation - a perfect Keynesian mess. In other words, yet another largely made up number designed exclusively to stimulate "confidence" in the economy and to get the Japanese population to spend, even with wages stagnant and hardly rising in line with the "adjusted" growth. And since none of the above matters with risk levels set entirely by FX rates, in this case the USDJPY, the early strength in the Yen is what caused the Japanese stock market to close red.