Home Resales in U.S. Probably Dropped in July for Fifth Month

 
By Shobhana Chandra


Aug. 27 (Bloomberg) -- U.S. sales of previously owned homes probably fell in July for a fifth consecutive month, showing the housing slump that triggered a collapse in credit markets will drag on, economists said before a report today.

The National Association of Realtors may report home resales declined 0.9 percent to an annual rate of 5.7 million, the slowest pace since October 2002, according to the median forecast of 70 economists in a Bloomberg News survey.

With no recovery in sight for residential real estate, lower property values and harder-to-get mortgages threaten to weaken consumer spending, economists said. The Federal Reserve this month acknowledged a growing risk to economic growth in the wake of subprime defaults and a plunge in stock prices.

``The long unwind in the housing sector will continue well into next year,'' said Joseph Brusuelas, chief U.S. economist at IDEAglobal in New York. ``The inventory of new and existing housing is far too large. The subprime crisis has eliminated the marginal buyers from the market.''

The Realtors group will release existing home sales figures at 10 a.m. in Washington. Estimates of the annual sales rate ranged from 5.5 million to 6 million in the Bloomberg survey.

New Home Sales

New home sales unexpectedly rose in July for the second time this year, to an annual pace of 870,000, the Commerce Department reported Aug. 24. Purchases may show renewed weakness as turmoil in credit markets pushes some mortgage lenders out of business and prompts others to restrict lending, economists said.

Monthly figures on home resales are compiled from contract closings and may reflect sales agreed upon weeks or months earlier, while new home purchases are recorded when a contract is signed, making them a more timely barometer. Resales account for about 85 percent of the U.S. housing market.

The Fed cut the rate charged on direct loans to banks Aug. 17 to try to increase the availability of capital after global stock markets plunged on concern that the subprime default crisis will spread and destabilize the financial system.

``The downside risks to growth have increased appreciably,'' policy makers said in a statement that day, reversing their stance Aug. 7 that inflation was the greatest risk.

Delinquencies on loans to subprime borrowers -- or people with poor-credit histories -- hit a five-year high in the first quarter, and builders started work on the fewest homes in a decade in July, recent reports show.

Lending Standards

Tighter rules for loans ``could further dampen residential investment,'' Fed Bank of Richmond President Jeffrey Lacker said Aug. 21 in a speech in Charlotte. ``Recent data on actual housing market activity have dampened my optimism'' about a bottoming-out in the industry, he said.

Lacker also predicted ``the drag from housing will continue for some time.''

Economists agree the glut of unsold properties is unlikely to ease anytime soon, and will put pressure on prices to fall further. Prospective homebuyers are waiting for better bargains, while subprime defaults and rising foreclosures raise the risk that more houses will get thrown back on the market.

Toll Brothers Inc., the largest U.S. luxury homebuilder, said third-quarter profit fell 85 percent as the deepening housing slump cut sales, increased cancellations and forced the company to write down property.

``We continue to wrestle with the interrelated challenges of softer demand and excess housing supply in most markets,'' Chief Executive Officer Robert Toll said on a conference call Aug. 22. ``Traffic is pretty stinky out there.''

In wider repercussions, some companies are facing limited access to credit. Countrywide Financial Corp., the largest U.S. mortgage lender, had to tap a credit line from its banks after being shut out of the commercial-paper market. Bank of America Corp. last week agreed to invest $2 billion in the company.

As Bernanke Retreats to Wyoming, Critics Ask Is He Prime Time

 
By Scott Lanman


Aug. 27 (Bloomberg) -- Ben S. Bernanke's critics from Washington to Wall Street are starting to ask whether the Federal Reserve chairman is ready for a prime-time crisis.

The global credit crunch is proving the severest test of Bernanke's 18-month tenure atop the U.S. central bank as he tries to avoid a recession while steering clear of bailing out those who made risky investments.

Some seasoned Fed watchers say he should have avoided the optimistic assertion that the damage caused by subprime mortgages was ``contained'' before the collapse of credit in the world's money markets prompted extraordinary central bank intervention earlier this month. Now, as he resists demands to cut the benchmark interest rate, the faultfinding, some from former Fed policy makers, has escalated to charges that he's behind in the game and losing his credibility and effectiveness.

``This is a make-or-break moment for Bernanke,'' says David M. Jones, a former Fed economist who has written books on the central bank. ``It is an early and maybe ultimate test'' for the Fed chairman, who finds himself in ``a position of weakness, not strength.''

Bernanke, 53, hasn't made any public comments since July. He'll break his silence with a speech on housing and monetary policy Aug. 31 at the Fed's annual retreat-cum-symposium in Jackson Hole, Wyoming, before central bankers and economists from around the world.

`Oblivious to Pain'

The Fed Aug. 17 cut the cost of direct loans to banks and revised its economic outlook, opening the door to lowering the benchmark interest rate. Before that, ``there was this growing sense that he was oblivious to the pain in the marketplace,'' says Lehman Brothers Holdings Inc. chief U.S. economist Ethan Harris.

``Monetary policy is very much about confidence,'' says Harris, a former New York Fed official who'll be in the audience when Bernanke speaks. ``If the Fed doesn't unfreeze the markets, we'll have a recession, but also reputationally it's important'' for Bernanke.

Bernanke's performance in a crisis is being compared with that of his predecessor, Alan Greenspan, whose make-or-break moment came less than three months into his chairmanship. When stocks crashed in 1987, Greenspan pumped out money to help the economy rebound, bolstering credentials that some politicians had doubted. ``That was an extraordinary baptism of fire,'' Greenspan, 81, said this year.

Greenspan's Experience

Greenspan was a respected economic forecaster before joining the Fed and was well-known in Washington, having served as an adviser to Presidents Richard M. Nixon and Gerald R. Ford. He often based his economic outlook on his own research and experience. Bernanke, a former Princeton University professor, came to the Fed without Greenspan's Washington experience and relies more on economic models and forecasts to guide his views.

Bernanke has weathered criticism before. As a Fed governor in 2002, he earned the title of ``Helicopter Ben'' when he said the Fed would do everything necessary to fight a deflationary slump, a strategy he compared to a ``helicopter drop'' of money.

As chairman in April 2006, Bernanke said the Fed might pause from raising rates even if economic risks were still tilted toward inflation. His candor made him appear soft on inflation to some bond investors.

Those incidents pale beside the pressure Bernanke faces now, in the most tumultuous month of his tenure.

On Aug. 7, Bernanke and the Federal Open Market Committee voted at their regular session to reiterate that inflation was their main concern, while acknowledging increased economic risks. Three days later, the Fed pumped $38 billion into the banking system -- the most since after the 2001 terrorist attacks -- in its first effort to contain the credit crunch.

Unprecedented Steps

The following week, with borrowing continuing to dry up, the Fed took steps unprecedented in recent years: It cut the rate on direct loans to banks while issuing a revised outlook that acknowledged economic risks had risen ``appreciably'' and omitted any mention of inflation.

While some of the turmoil subsided, many financial-market participants clamored for Bernanke to follow the discount-rate cut with an immediate reduction in the benchmark federal funds rate to stimulate the economy.

His defenders say Bernanke's decision to stop raising interest rates a year ago ultimately proved correct, and so will his policies now.

Bernanke's Defenders

One who'll speak up for Bernanke's approach at Jackson Hole is Stanford University economist John Taylor, a former Treasury official. The Fed has made ``good decisions'' in the past two weeks, he said in an interview.

Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh, agrees: ``Bernanke's handled this very well, despite some hysterical cries on Wall Street.''

``He's been very balanced, setting up the possibility of a fed funds cut, but for the right reasons,'' Hoffman says.

Bernanke's academic work, which includes a study of the Fed's role during the Great Depression, equips him well to deal with the current crisis, says Lyle Gramley, a former Fed governor and now senior economic adviser to the Stanford Group Co. in Washington.

``The economist who has done the seminal work on the impact of credit crunches on the economy is named Ben S. Bernanke,'' says Gramley, 80, who'll also be at Jackson Hole. ``He's well aware of the fact that this situation could pose serious downside risks for the U.S. economy. His views are the ones that are going to ultimately prevail.''

Even so, criticism of Bernanke continues to mount, including an unusual public airing from former Fed policy makers.

Former Policy Makers

Former Fed governor Wayne Angell, 77, wrote an opinion column in the Aug. 23 Wall Street Journal calling for a cut in the federal funds rate and saying the central bank ``will continue to fall behind'' if it waits for more evidence of an economic slowdown.

``What the Fed did was too slow, and maybe it's because they're too cloistered,'' Martha Seger, 75, a Fed governor from 1984 to 1991, said in an interview. ``They're out of touch with what's going on in the real world. The problems that are out there go way beyond Wall Street.''

And former Dallas Fed President Robert McTeer, 64, said in an interview that he disagreed with the Fed's Aug. 7 view that inflation was still the ``predominant'' concern.

Some members of Congress are joining in.

`More Assertive'

Senator Sherrod Brown, an Ohio Democrat who serves on the Banking Committee, said in an interview that he wishes Bernanke had been ``a bit more assertive and aggressive on pre-empting much of this and in fixing what he can.''

Barney Frank, the Massachusetts Democrat who chairs the House Financial Services Committee, wants to discuss the issue after returning from Congress's August recess: He is convening a hearing on the market turmoil Sept. 5 with Fed and Treasury officials.

Frank said in an interview he continues to believe Bernanke ``is as good as we could have gotten from this administration.'' Still, Frank says, ``I am troubled that he is too much of an `inflation-is-the-only-issue' chairman.''

Senate Banking Committee Chairman Chris Dodd, a Connecticut Democrat, summoned Bernanke and Treasury Secretary Henry Paulson to an hour-long meeting Aug. 21 and said Bernanke had agreed to use ``all of the tools at his disposal'' to restore stability in financial markets.

When he speaks, Bernanke may end up disappointing investors who are looking for fresh guidance on Fed policy.

Bernanke will ``say absolutely nothing about what the Fed might do,'' said former Fed vice chairman Alice Rivlin, 76, now a senior fellow at the Brookings Institution in Washington. ``He just wants to make everybody feel that the Fed is in good hands and that he is in charge.''

Muto Is Less Likely to Replace Fukui as BOJ Chief (Update1)

 
By Mayumi Otsuma


Aug. 27 (Bloomberg) -- Bank of Japan deputy chief Toshiro Muto is less likely to become the next governor since the opposition won last month's election, casting doubt on the central bank's policy of gradually raising interest rates.

The number of economists predicting Muto will replace Toshihiko Fukui, whose five-year term expires in March, dropped to eight out of 15 last week from all 15 in June, according to Bloomberg News surveys.

The opposition Democratic Party of Japan's control of the Upper House allows it to block nominations for the job. That could reduce Muto's chances and increase those of someone who might break from Fukui's plans to increase borrowing costs. The DPJ disapproved of Muto's appointment as deputy governor in 2003, citing his background at the Finance Ministry.

``If the DPJ sticks to its argument, the possibility of Mr. Muto becoming the central bank chief would be low,'' said Mamoru Yamazaki, chief economist at RBS Securities Japan Ltd. in Tokyo. ``But he still has a chance; whether he can win the trust of the DPJ by March will be key.''

Muto, 64, formerly the Finance Ministry's top official, has said the bank needs to raise rates gradually as the world's second-largest economy expands, signaling he'd continue Fukui's policy if selected.

The Cabinet's nominations of the governor and two deputies require the approval of both houses of parliament, according to the Bank of Japan Law. The Democrats oppose the practice in Japan of bureaucrats landing new senior positions at public and private institutions after their retirement.

Reluctant Support

The party's Secretary General Yukio Hatoyama and Vice President Naoto Kan suggested after the election that they would be reluctant to support Muto should he be nominated.

Hatoyama recently softened his stance, telling reporters on Aug. 10 that the party ``doesn't automatically negate'' the possibility of choosing Muto and it wants to hold a public hearing of candidates.

``Any signs that the DPJ may accept Mr. Muto's nomination means a lot,'' said Akio Makabe, a professor of economics at Shinshu University in Nagano, central Japan.

The Democrats' election win boosted the chances for Kazuo Ueda, a Tokyo University professor who sat on the bank's policy board for seven years through 2005. Six analysts surveyed said Ueda, 55, is now the most likely candidate.

In response to a question asking economists to list three potential nominees, Ueda was mentioned 14 times and Muto 12.

Ueda's Dissent

Ueda dissented when the central bank raised rates from near zero in August 2000, judging that the economy was too weak to withstand tighter credit. The bank cut borrowing costs seven months later as the global economy faltered. He told the Nikkei newspaper in May that Japan has yet to beat deflation.

``The pace of Japan's interest-rate hikes would probably slow if Mr. Ueda becomes governor,'' RBS's Yamazaki said. ``Investors would adjust their outlook for rates accordingly.''

The central bank last week kept the key overnight lending rate at 0.5 percent, the lowest among major economies, after global financial-market turmoil clouded Japan's growth prospects.

Fukui told reporters after the decision that keeping borrowing costs too low may spur risky investments. The bank will make an appropriate judgment by examining ensuing data and market movements, he said. The bank raised rates for the first time in almost six years in July 2006 and again in February.

Investors see a 36 percent chance policy makers will raise the key rate at the Sept. 18-19 board meeting, according to Credit Suisse Group calculations based on interest payments.

Less Willing

The ruling Liberal Democratic Party's election rout may make the government less willing to comment on the bank's policy, economists said. Prime Minister Shinzo Abe is expected to announce a Cabinet reshuffle today.

LDP Secretary General Hidenao Nakagawa, a critic of Fukui's pursuit of higher interest rates, last month said he would resign to assume responsibility for the election defeat. The government should study the effect of the two rate increases on economic growth, he said last week.

``The DPJ's advance may make it easier for the Bank of Japan to go ahead with policy it considers to be appropriate,'' said Teizo Taya, a former central bank board member and now adviser to the Daiwa Institute of Research in Tokyo.

Others the economists mentioned as potential candidates included Muto's fellow deputy Kazumasa Iwata, former deputy Yutaka Yamaguchi, ex-board member Nobuyuki Nakahara and former executive director Minoru Masubushi.

Those listed from outside the bank included Eisuke Sakakibara, a former vice finance minister for international affairs, Hiroshi Okuda, former chairman of Toyota Motor Corp., and Hiroshi Yoshikawa, a Tokyo University professor.

Consumer Spending Gains, Home Sales Fall: U.S. Economy Preview

 
By Joe Richter

Aug. 26 (Bloomberg) -- Consumer spending in the U.S. picked up in July while home sales fell, a sign income gains are sustaining demand even as the housing recession deepens, economists said before reports this week.

Personal spending increased 0.3 percent last month, three times the gain in June, according to the median forecast of economists surveyed by Bloomberg News before a Commerce Department report. Purchases of previously owned homes probably fell to an annual rate of 5.70 million, the fewest since October 2002, according to the survey.

The labor market has so far been strong enough to prevent a collapse in spending, softening the blow to the economy from a drop in home values and a widening credit crunch. Even with a resilient consumer, Federal Reserve policy makers said on Aug. 17 that ``downside risks to growth have increased appreciably,'' increasing speculation they will cut interest rates next month.

``The consumer is slowing but still healthy,'' said Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. in New York. ``There's now tightening in many credit markets and it's harder to borrow, so the Fed is worried about a broad-based slowing in the economy rather than a housing-centric slowdown.''

The spending report, due Aug. 31, may show incomes rose 0.3 percent after a 0.4 percent gain in June, according to the median estimate of economists surveyed by Bloomberg.

The report's price gauge tied to spending patterns and excluding food and energy costs, the Fed's preferred measure, probably rose 2 percent from July 2006, up from 1.9 percent in June, which was the smallest 12-month increase since 2004.

Fifth Decline

The forecast decline in sales of previously owned homes would be the fifth straight drop reported by the National Association of Realtors. The figures are expected tomorrow.

Higher borrowing costs and stricter lending standards are making it more difficult to qualify for loans, causing a rise in the number of unsold homes and pulling prices lower.

A report the following day may show declines in home prices in 20 U.S. metropolitan areas during June. The S&P/Case-Shiller index has fallen every month this year.

``We continue to wrestle with the interrelated challenges of softer demand and excess housing supply in most markets,'' Robert Toll, chief executive officer of Toll Brothers Inc., said in a statement last week. Toll is the largest U.S. luxury homebuilder.

Subprime Fallout

Lenders and many borrowers are under increasing strain as the fallout from the collapse of the subprime mortgage market spreads. Mortgage applications fell 5.5 percent in the week ended Aug. 18, according to the Mortgage Bankers Association.

The crisis is compounding consumer concerns about falling home values and elevated energy costs. Sentiment among U.S. consumers dropped in August to the lowest level in a year, according to an Aug. 17 report from the University of Michigan.

A similar report from the New York-based Conference Board on Aug. 28 may show confidence among Americans this month was the lowest in a year.

The Fed cut the rate on direct loans to banks this month, trying to increase liquidity as investors avoid assets linked to subprime mortgages. Fed officials left the benchmark federal funds rate unchanged at 5.25 percent.

The Fed's view that downside risks had grown may have signaled a reversal from its Aug. 7 outlook that inflation was the greatest risk. Minutes of the Federal Open Market Committee's most recent meeting will be released on Aug. 28.

Bets on Fed Cut

Interest-rate futures on Aug. 24 showed traders reduced bets that the Fed will lower its overnight lending rate between banks by a half-percentage point to 4.75 percent by its Sept. 18 meeting. Futures showed a 60 percent chance of a cut to 5 percent, compared with 40 percent odds a week earlier. Forty percent were betting on a cut to a 4.75 percent funds rate by then, down from 60 percent the prior week.

A Bloomberg survey of economists, taken Aug. 1 to Aug. 8, forecast consumer spending to rise at a 2.3 percent pace in the third quarter after a 1.3 percent pace in the second quarter.

Some retailers lowered earnings estimates this month, raising concern that the consumer may have lost steam since that survey was taken, economists said.

Wal-Mart Stores Inc. and Home Depot Inc., the two largest U.S. retailers, on Aug. 14 said the housing slump, rising mortgage defaults and high energy prices will depress earnings for the year.

General Motors Corp., the biggest U.S. automaker, is trimming production at six North American plants that make large pickup trucks and sport-utility vehicles to clear dealer lots of excess inventory.

`Modest' Impact

Still, Fed Vice Chairman Donald Kohn said Aug. 19 that the effect of the subprime-mortgage crisis on U.S. consumer spending will likely be ``modest,'' though there's risk of a bigger slump.

Retailers Target Corp. and Saks Inc. said last week that sales will rise this year on the success of higher-margin designer goods.

On Aug. 30, the government will issue the second of three estimates of second-quarter growth. A narrower trade gap in June probably pushed up growth during the quarter to a 4.1 percent annual rate, compared with the 3.4 percent pace the government estimated on July 27.

Figures the following day from the National Association of Purchasing Management-Chicago will show business activity this month expanded at a pace similar to July, while a government report will show a second straight gain in factory orders, economists said.

Trichet May Keep Options Open as Investors Look for Rate Signal

 
By Simon Kennedy

Aug. 26 (Bloomberg) -- European Central Bank President Jean- Claude Trichet may buy time tomorrow as he seeks to thaw a credit-market freeze without surrendering a two-year fight against inflation.

In his first speech since the financial-market rout began, Trichet may disappoint investors wanting a clear signal whether he will raise interest rates on Sept. 6. He may instead keep his options open, pledging liquidity to the banking system without closing the door on an increase. He speaks at 3 p.m. in Budapest.

``The ECB is far from decided,'' said Michael Hume, chief European economist at Lehman Brothers Holdings Inc. in London. Trichet's speech ``seems too soon to clarify matters.''

A week ago, investors bet that the global contraction in credit would prevent the ECB lifting its benchmark rate from 4 percent. That view is now in doubt after the ECB on Aug. 22 loaned an additional 40 billion euros ($55 billion) to banks and said it was sticking to the policy stance expressed by Trichet on Aug. 2. Then, he promised ``strong vigilance,'' a phrase used to foreshadow each of the eight rate increases since 2005.

Investors reacted by reviving their wagers that the ECB will boost borrowing costs by a quarter point in September. The implied rate on the September interest-rate futures contract rose to 4.57 percent last week from 4.34 percent on Aug. 10.

Forecasts Abandoned

At the same time, some economists have scrapped their forecasts for further ECB tightening.

``Additional tightening from the ECB now risks exacerbating the current crisis and could prompt an even sharper slowdown,'' said James Nixon, an economist at Societe Generale SA in London who used to work as a forecaster at the ECB. ``We now expect the ECB to hold rates at 4 percent until at least the spring of next year.''

There is evidence that the fallout from the collapse in the American market for subprime mortgages is hurting Europe.

BNP Paribas SA, France's biggest bank, was forced to halt withdrawals from three of its investment funds, while Landesbank Sachsen Girozentrale, the German state-owned bank, is getting emergency funding.

UBS AG, Europe's largest lender, said Aug. 14 profit may decline for the rest of the year because of turmoil in financial markets. On Aug. 15, Merrill Lynch & Co. equity analysts cut their rating on Deutsche Bank AG, saying the squeeze in credit markets will reduce earnings.

`Deep Thinking'

The French and Italian finance ministries have urged Trichet to keep rates unchanged.

``We've had a severe deficit of confidence that fueled a liquidity shortage, which will in turn reduce the amount and terms of credit to companies,'' French Finance Minister Christine Lagarde said in an Aug. 24 interview. ``There has to be deep thinking about what is really taking place.''

Whether Trichet, 65, follows through with his August plan to raise borrowing costs will depend on how successful he is in calming market turbulence and ensuring it doesn't curb economic growth. The euro-region economy slowed more than forecast in the second quarter, and a report last week showed manufacturing and services growth slackened in August.

The ECB is already using other tools to smooth inter-bank lending, extending loans and adding 211.3 billion euros of extra cash to the money market between Aug. 9 and Aug. 14.

Should these operations ease investors' concerns, Trichet may be able to keep fighting inflation, said Marco Annunziata, chief economist at UniCredit Markets & Investment Banking in London.

`Crucial Distinction'

The ECB is ``highlighting a crucial distinction: While they are injecting liquidity as a short-term tactical move, their strategic policy stance does not necessarily change,'' Annunziata said.

Robert Lind, chief economist at ABN Amro Holding NV in London, sees reasons for the bank to lift rates regardless of the market rout: Growth remains above potential, spare capacity is shrinking and inflation is likely to accelerate above the ECB's 2 percent limit.

Trichet may also be worried about giving the impression he is prepared to alter monetary policy to rescue investors from risky wagers that went wrong, said Lind. ``The ECB will want to push rates to a more restrictive setting,'' he said.

Trichet has already given himself room to maneuver by noting on Aug. 2 that the council ``never pre-commits'' on rate shifts. Jim O'Neill, chief economist at Goldman Sachs Group Inc. in London, says he'll try not to close off any policy options tomorrow.

``Trichet is quite experienced in crisis management,'' he said. ``He's arguably the most experienced central banker in the world, so he should be able to find the right phraseology.''