TEFF

Things to ponder based upon TEFF -

- Loan pricing pressures increase

- Regulatory burden will continue to be a major part of life for the banking world

- Housing is still a wild card and one must tread lightly as we proceed through this cycle of recovery

End note: there is a lot for the Fed (and our fearless leaders in DC) to deal with in our economic progression as we crawl through the uncharted territory of the new normal where risk is becoming even more difficult to measure accurately...

The 10-year Treasury was bludgeoned yesterday with its yield rising 16.5 bps intraday. The yield opened at 2.00%, closed at 2.16%, and traded as high as 2.23% overnight. However, Treasuries have a little bit better support this morning and the 10-year yield has dropped back down to 2.14%. Many startled investors have questioned how far this can go. As discussed in our most recent economic outlook, central bank activism is keeping yields in a lower-than-should-be range. The economic data, on an absolute basis, points to yields being 100 to 200 bps higher. However, central bank asset purchases (Fed and BOJ currently active) have displaced investors and skewed the supply/demand dynamics in most liquid asset classes. Any hint that the Fed will slow or stop purchases will create volatility – particularly in bonds where the prices are so far from their fundamental valuations. The Fed will, in all likelihood, be forced to come in and talk yields back down before it’s all said and done. A sharp rise in yields could prove too much for the economy to handle, particularly when housing is so critical to growth. The question to answer today is how far will yields need to rise before the Fed becomes concerned. Of course, Europe could come to the rescue like they have several times, and put out some negative news which would have the same effect.

The CEO of a Wall Street lobbying group, Financial Services Forum, penned an op-ed in Politico today advocating for community banks. Rob Nichols said, “"[C]ommunity banks are struggling under the burden of what Federal Reserve Board Governor Elizabeth Duke recently called 'a tsunami of new regulations.' … It is critical that policymakers act to improve the circumstances for community banks. … {They] should be exempt from the most onerous and costly aspects of Dodd-Frank. In considering capital standards such as Basel III, regulators should formulate a simplified framework that adjusts requirement and compliance details to the smaller scale and more straightforward activities and operations of community banks." 

Home prices rose 1.12% in March according to the S&P CaseShiller Home Price Index, bringing prices up 10.87% year-over-year. Looking at the non-seasonally adjusted data, 18 of the 20 MSAs saw prices rise with Minneapolis (-1.1%) and New York (-0.4%) showing declines. San Francisco led the way higher, jumping 3.9% on the month. As prices continue to rise, consumer confidence will continue to improve. That was particularly apparent in another release yesterday morning, the Conference Board’s measure of consumer confidence. Consumer confidence rose to its highest level since 2008 in May. The headline index jumped from 69.0 to 76.2, well above expectations for a modest gain. Along with improving home prices, stocks continue to run up while gas prices remain relatively low. Consumption indicators for 2Q point to growth of 2.4% to 2.7% versus 3.2% in 1Q. While this might sound disappointing, it is markedly better than the indicators looked a month ago. 

Chart Of The Day

Source: The Market Online Today