DOW – 140 = 17,898
SPX – 14 = 2094
NAS – 31 = 5051
10 YR YLD +. 01 = 2.39%
OIL – .74 = 60.03
GOLD – .70 = 1182.30
SILV – .07 = 16.06
The Trans Pacific Partnership trade deal hit a major roadblock today. The House rejected a key part of a package to fast-track the trade deal. The House voted today on two measures, both of which had to pass in order to send the legislation, which was already approved by the Senate, to the president. A bill to give the president fast-track authority to negotiate future trade deals was approved by a 219-211 vote. But another measure regarding funds to retrain workers failed, 126 to 302. Because the Senate had approved both measures, the failure of the retraining program prevented the package from advancing. The measure would give the Obama administration the ability to wrap up negotiations on the Trans-Pacific Partnership, a free-trade deal years in the making, and present a final agreement to Congress for expedited consideration and an up-or-down vote with no amendments.
In one of the more unusual coalitions of the Obama administration, the trade agenda found strong support with Republicans, while Democrats ended up blocking the measure. Democrats had repeatedly asked for the administration to make the trade deals public before seeking the fast-track power. Democrats also complained that the fast-track measure fails to protect workers, environmental standards and financial regulations, and does nothing to stop unfair currency manipulation. The failure does not necessarily mean an end to the battle. House Speaker John Boehner can bring the measures back if he can find a way to whip up more support.
New information reveals that more personnel records were hacked than previously reported during the federal cyber theft in December. Already considered one of the largest thefts of US government personnel data in history, investigators now estimate that it may include data on as many as 14 million people, more than triple the 4 million current and former government employees reported by the Office of Personnel Management last week. Officials are now weighing responses ranging from counter-intelligence initiatives to destroying the data in the intruders’ servers.
The producer price index increased 0.5 percent in May, the biggest one-month increase since September 2012. Prices at the wholesale level were pushed higher by a sharp jump in the cost of gasoline and a record increase in the price of eggs because of the avian flu. Core prices, which exclude energy and food, rose just 0.1 percent in May. Even with the advance in May, producer prices over the past 12 months are 1.1% lower.
Consumer confidence rose more than forecast in June. The University of Michigan preliminary consumer sentiment index increased to 94.6, from a final reading of 90.7 in May that was the lowest in six months. Consistent gains in the labor market are cited as a major reason for increased confidence, and likely helped underpin household spending, reflected in yesterday retail sales report which showed sales increased 1.2 percent last month.
Yesterday, there were reports that Greece might be nearing a deal on its debt problems. Then late yesterday the International Monetary Fund recalled its negotiating team from talks in Brussels, which might signal doom for any resolution. In response, Greece ruled out cutting pensions and demanded a debt restructuring. So, the battle lines are drawn, or redrawn, and next week EU officials will meet again in Luxembourg for a likely showdown, or it might be part of the game of chicken that both sides seem to be playing. The Greek tragedy could drag out for quite some time or it could come to a head at almost any time, and if a resolution is not found, there will almost certainly be a domino effect.
More bad news from the Eurozone today; Standard & Poor’s says Britain’s “economic policymaking could be at risk of being more exposed to party politics than we had previously anticipated.” The Credit rating agency says it is “similar to the situation in the U.S. in 2011.” Not exactly. The situation in Britain deals with a possible referendum vote on leaving the European Union in 2017. S&P lowered the outlook on the Britain’s AAA rating to “negative” from “stable.” That means there’s a one-in-three chance of a downgrade in the next two years. In its analysis, S&P said that PM Cameron’s pledge for a vote, made to placate elements of his Conservative Party, “represents a risk to growth prospects” for U.K. financial services, exports and the economy as a whole.
The number of borrowers who owe more on their home than it’s worth is falling, but there are still a number of borrowers who are deeply underwater. Zillow released its 2015 Q1 Negative Equity Report, which showed that negative equity fell in the first quarter of 2015 to 15.4% from 16.9% in the fourth quarter of 2014, and 18.8% during the same time period a year ago; negative equity peaked nationally at 31.4% in the first quarter of 2012. The rate of negative equity improved in all of the 35 largest housing markets in the first quarter of 2015. The rate of underwater homeowners is much higher among the homes with the least value. More than 25% of those who own the least valuable third of homes were upside down, compared to about 8% of the most valuable third of homes.
At the peak of the crisis, more than 15 million homeowners owed more on their mortgages than their homes were worth. Since then, foreclosures, short sales and rapidly rising home values freed nearly half of those homeowners, leaving 7.9 million homeowners upside down at the end of the first quarter; of those that are still underwater, over half or about 4 million owners, still owe 20% more than the value of their home, making it difficult for them to get out from under their mortgage.
For Phoenix, the negative equity rate in the first quarter was 19%, which works out to almost 147,000 homes in negative equity, and 56% of those owners were underwater by more than 20%. And 12.9% of underwater homeowners in Phoenix owe more than twice their home’s value to the bank. While home prices in Phoenix have recovered, according to Zillow valuations, prices are still down 26.9% from the peak.
Actually, it’s worse than that. Realistically, a homeowner needs roughly 20 percent equity in their home to afford the taxes and fees associated with listing and selling it and still have enough left over to afford a reasonable down payment on another home. When including these homeowners with less than 20 percent equity in their home, the national “effective” negative equity rate is 33 percent. Put another way, a third of all homeowners with a mortgage don’t have enough equity to list their home for sale and buy another. And while it’s great that the level of negative equity is falling, there are still so many homeowners underwater that it will likely be years before we get back to more normal levels of around 2% negative equity; and while we wait, many homeowners are stuck in their homes.
Next week the Federal Reserve FOMC will meet to determine monetary policy. No change is expected, although we will watch for any hint about when they plan to hike rates in the future. Also next week, the Fed will publish new quarterly forecasts, and all eyes are going to be on where they set the natural rate of employment; that’s the level of employment that is just strong enough to lift the economy without setting inflation on fire. Many people think the natural unemployment rate is about 5%. The current unemployment rate is 5.5%; so we are close. A new paper by Fed board staff shakes up this view by suggesting the number could be as low as 4.3%; the reason being that wages have not been keeping pace with hiring.
The bigger news next week will be Thursday, when Pope Francis will publish his much anticipated encyclical on the environment and climate change. An encyclical is a letter to followers, about 1.3 billion in this case.
An encyclical is not a scientific document, rather one that explores a particular issue in the light of Catholic social teaching. Yet the Pontifical Academy of Science has thoroughly investigated the research, producing its own documents on topics such as glacier retreat, and it is clear that we must take on board what the science is telling us. Francis will not approach the issue of ecology as a scientist (though he is a trained chemist) or as a politician (though he clearly has excellent political instincts). Rather, he will address his flock as a pastor, a teacher, theologian and spiritual guide. He will remind us that Creation is a gift from God, and that we have a moral responsibility to be responsible stewards. Creation in this instance means more than the ground we walk on and the air we breathe. It also means all of humanity, including the poorest, who are also the most vulnerable to climate change.
By tying climate action to the Christian mandate to aid the afflicted and give comfort to the needy, Pope Francis will be doing much more than merely acknowledging the severity of the problem. By virtue of his moral authority, the pope has the singular ability to mobilize people all over the globe to take whatever form of action they can. No other figure of our time can claim that degree of influence. The climate change narrative is about to change; no longer a debate about science or business; now it will be a moral issue, a religious issue; a simple matter or right or wrong. And with Pope Francis leading the charge, the climate change deniers and fossil fuel apologists will soon realize they haven’t got a prayer.