Mish's Global Economic Trend Analysis

Mayor of Barcelona Prepares New Digital Local Currency
As Draghi Hints at More QE, German Bond Yields Hit Record Low Negative Yields; Economic Madness
Existing Home Sales Up 4.7% Following Last Month's 5% Decline; Home Price Weakness

Mayor of Barcelona Prepares New Digital Local Currency

Posted: 22 Oct 2015 09:04 PM PDT

The new mayor of Barcelona, Ada Colau, says Preparations Underway for New Local Digital Currency.

The objective of the currency, whose name will be decided after a participatory process, is to "promote local businesses."

Libre Mercado says the plan looks more like a publicity campaign for Barcelona. The Bank of Spain called the currency "impossible besides undesirable".

I point out that Barcelona is the capital and largest city of Catalonia, the second-largest city in Spain and the center of one of the largest metropolitan areas in Europe.

Please note the connection: Pro-independence parties in Spain won an outright majority in the recent Catalonia regional election.

Reuters reported Victorious Separatists Claim Mandate to Break with Spain.

I commented Pro-Independence Parties in Catalonia Unite to Form Government; Showdown with Madrid Coming Up

That showdown now includes a new digital currency.

Mike "Mish" Shedlock

As Draghi Hints at More QE, German Bond Yields Hit Record Low Negative Yields; Economic Madness

Posted: 22 Oct 2015 11:53 AM PDT

Quantitative easing in the eurozone to the tune of €1.1 trillion has not raised consumer price inflation as the ECB had expected.

But neither bureaucrats nor central planners ever evaluate the effectiveness of their programs. Rather, when something does not work, they do more of it, until it does work, with no regard for the economic bubbles or other negative consequences.

Those expecting more monetary madness were rewarded today when the ECB Opens the Door to December Stimulus as expected.

The European Central Bank signalled it would expand its €1.1tn quantitative easing programme in December and cut its deposit rate should the slowdown in emerging markets threaten the eurozone's economic recovery.

The euro plunged 1.67 per cent against the dollar to $1.116 after Mario Draghi, the ECB's president, said policymakers' measures would need to be "re-examined" in December.

He said the central bank stood ready to adjust the "size, composition and duration" of its QE package. At the moment, it is buying €60bn of mostly government bonds a month and has said it will continue to do so at least until September 2016.

Government bond yields, which move inversely to prices, fell across the region, with Italian and Spanish benchmark 10-year borrowing rates dropping to the lowest level since April and the shorter-term two-year German borrowing rate hitting a record low of minus 0.32 per cent.

As well as expanding the QE programme, the ECB could also break an earlier promise to leave interest rates unchanged and cut its deposit rate further into negative territory, a move which is likely to further weaken the euro if implemented.

The ECB president said cuts into negative territory by other central banks, such as the Swiss National Bank and Scandinavian authorities, had led the ECB to reassess where the lower boundary for interest rates lay.

"We've seen the experience of other central banks and now we're thinking about that," Mr Draghi said.

With that, let's take a look at some currency and interest rate reactions.

German 2-Year Bond Yield

German 2-Year Bond Yield Weekly

Italy 10-Year Bond Yield

Spain 10-Year Bond Yield

US 30-Year Bond Yield

Euro/US Dollar

In Europe, there were large interest rates swings in nearly every county. In Germany the move was primarily in short-term durations. In the peripheral countries, the swings were in longer term durations.

In the US, treasury yields declined, but the move was muted.

In Forex, Draghi got an oversized move where he wanted as the Euro sank vs. the US dollar.

A strong US dollar has hurt US manufacturers so the Fed will likely not be pleased with this competitive currency debasement.

Economic Madness

Quite frankly it's nothing but economic madness to demand consumer price inflation.

Nonetheless, central banks are not only bound and determined to achieve inflation, but with methods that failed for decades in Japan and more recently in both Europe and the US.

My Challenge to Keynesians "Prove Rising Prices Provide an Overall Economic Benefit" is still unanswered.

Mike "Mish" Shedlock

Existing Home Sales Up 4.7% Following Last Month's 5% Decline; Home Price Weakness

Posted: 22 Oct 2015 09:44 AM PDT

Existing home sales bounced this month, coming in just above the high end of Econoday Economists' Estimates.

Existing home sales bounced back very strongly in September, up 4.7 percent to nearly reverse the prior month's revised decline of 5.0 percent, a decline that now looks like an outlier. The month's annual sales rate, at 5.55 million, is just beyond Econoday's top-end forecast and the second best reading of the recovery. The year-on-year percentage gain, at plus 8.8 percent, is back where it was during the sales gains of the spring.

The gain is centered entirely in the single-family component which rose 5.3 percent to a 4.93 million rate to underscore the strength of demand. Sales of condos, which cost less, were unchanged at a 620,000 rate.

But the report's price data, in an echo of this morning's FHFA report, are on the soft side, down 2.9 percent for the median to $221,900. Year-on-year, the median is just over 6 percent, at 6.1 percent.

Prices may have to firm further to pull more homes into the market where supply is very thin, at 4.8 months vs 5.1 months in August and 5.4 months a year ago. Six months of supply is generally considered the balancing point for supply and demand. In actual numbers, there were 2.21 million existing homes up for sale in the month for a 2.6 monthly decline and a 3.1 percent year-on-year decline.

Regional sales data are remarkably even with the Northeast showing an outsized monthly gain of 8.6 percent for an 11.8 percent year-on-year rise. The Midwest is out in front in year-on-year terms, at plus 12.0 percent, with the South, which is by far the largest housing region, lagging at the back with a 5.7 percent year-on-year gain. All regions posted gains in the month.

This report, which wraps up a busy and mostly positive week for housing data, is a big plus for the housing outlook, suggesting that demand for existing homes may be catching up with demand for new homes.

Demand For New Homes

That last statement by Econoday is amusing.

For starters, new home sales are not all that strong, and it is new home sales that contribute most to GDP and family formations.

You cannot sell what you don't start, so let's take a look at numbers from my October 20 article Housing Starts Surprise to Upside Led by Multi-Family, Permits Surprise to Downside

Single-Family Starts

That chart add quite a bit of needed perspective on the housing "recovery".

Existing Home Sales

Builders better be hoping that existing homes sales don't "catch up" to new home sales. And they also better be hoping that price trends in new homes don't match weakness in existing prices.

Home Price Weakness

Trends in Suburbia:Chicago Suburbs $1 Million+ Home Sales "Not Totally Dead" Yet; Rush for the Exit
Case Shiller: Striking Weakness in Home Prices

And what about optimism vs. actual buyer traffic? I'm glad you asked.

Homebuilder Confidence Soars to Highest Level in 10 Years Despite Falling Traffic.

Mike "Mish" Shedlock

Economy News

22.10.15

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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