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FED Warns Against Rising Delinquency Rates, Calls It A "Leading Indicator That Things Are About To Get Worse"

Austan Goolsbee, President of the Chicago Federal Reserve Bank, highlighted that consumer delinquencies are among the most worrisome economic indicators currently being monitored. His concerns now appear prescient as new data reveal a significant uptick in delinquency rates in the first quarter of 2024.

"If the delinquency rate of consumer loans starts rising, that is often a leading indicator that things are about to get worse," Goolsbee stated.

Recent figures from the Federal Reserve published last week confirm these fears, showing that aggregate delinquency rates have increased, "with 3.2% of outstanding debt in some stage of delinquency as of the end of March."

This marks a notable rise in financial distress among consumers.

The data indicates that the transition rates into delinquency have surged across all debt categories.

About 8.9% of credit card balances and 7.9% of auto loans have become delinquent annually. Although the transition rate for mortgages increased by 0.3 percentage points, it remains low by historical standards.

"In the first quarter of 2024, credit card and auto loan transition rates into serious delinquency continued to rise across all age groups," said Joelle Scally, Regional Economic Principal within the Household and Public Policy Research Division at the New York Fed. "An increasing number of borrowers missed credit card payments, revealing worsening financial distress among some households."

Despite these concerning trends, the Federal Reserve has not identified a single cause for the rising delinquency rates. Instead, it suggests that several factors could be at play.

Amid the pandemic, Americans increased both savings and spending, potentially continuing their high expenditure rates without the cushion of substantial savings, thus relying more on debt.

Additionally, there has been an uptick in lending to borrowers with lower credit scores in recent years, which might also contribute to the increasing delinquency rates.

As the situation develops, policymakers and financial institutions must closely monitor these indicators to address potential economic fallout. Rising delinquency rates could signal more significant economic issues, necessitating a cautious and proactive approach to prevent further deterioration.

Stocks sink as bond sell-off fuels jitters

Tepid demand for new US Treasury auctions drives rates higher and prompts a retreat in major stock indices

A global bond sell-off intensified on Wednesday and prompted a stock retreat as well, following the latest in a series of US Treasury auctions to receive a lukewarm reception from investors.

An auction for $44bn of new seven-year Treasury notes in the early afternoon was met with tepid interest from buyers, the third weak US government bond auction in two days. Auction sizes were increased earlier this year and investors and analysts have since warned about the market’s capacity to absorb the deluge of new supply.

Treasury yields broadly rose to their highest levels in a month following the seven-year auction, building on a sell-off that had started the day before in the wake of weak two- and five-year auctions. The benchmark 10-year Treasury yield rose to a peak of 4.64 per cent, its highest level since early May. Bond yields rise as prices fall.

Stocks had sold off earlier in the day, though the auction ultimately had little effect on the main Wall Street indices. The S&P 500 was down 0.5 per cent in mid-afternoon, while the Nasdaq Composite was down 0.2 per cent.

European stocks were more downbeat. London’s FTSE 100 shed 0.7 per cent, France’s Cac 40 lost 1.5 per cent and Germany’s Dax fell 1.1 per cent. The region-wide Stoxx 600 fell 1 per cent.

The equity and bond market moves came after the release of strong consumer confidence data on Tuesday — which lowered expectations of interest rate cuts in the near future.

Hawkish comments from Minneapolis Federal Reserve President Neel Kashkari fanned the sell-off as traders looked ahead to Friday’s release of the US Federal Reserve’s preferred inflation gauge. “I don’t think anybody has totally taken rate increases off the table,” Kashkari said on Tuesday.

“Blame bond yields” for the stock market slide, said Chris Turner, a currency strategist at ING.

Soft Treasury auctions and higher than expected Australian inflation overnight had pushed longer-dated global bond yields higher, all of which eventually proved “a headwind to equities,” he said.

Analysts at Royal Bank of Canada said “yesterday’s [US Treasury] weakness, spurred by weak auction results . . . continued overnight” and “weighed on equities”.

Yields on 10-year German bonds rose 0.10 percentage points to 2.69 per cent, the highest level since November.



Data published on Wednesday showed German inflation picked up more than forecast to a four-month high owing to an acceleration of services prices. German wages rose 6.4 per cent in the first quarter, separate data showed, giving workers in Europe’s largest economy their biggest real-terms pay rise after inflation since records began in 2008.

Investors turned to energy stocks even as prices for Brent crude, the international oil benchmark, slipped 0.6 per cent to $83.70 a barrel. Among the Stoxx 600’s 20 constituent sectors, only energy rallied on the day, up 0.3 per cent. 

The “global trend of risk-off” in equity and bond markets has left companies tied to in-demand commodities as the “only safe havens”, JPMorgan analysts said in a note to clients on Wednesday.

The US dollar index, a measure of the dollar’s strength against a basket of six other currencies, was up 0.4 per cent.

Sterling, meanwhile, rose to a 21-month high against the euro as traders backed away from bets on imminent Bank of England rate cuts. 

Freddie Mac proposes buying home equity loans

Government-backed mortgage securitizer Freddie Mac is considering whether to broaden out its portfolio from first-time mortgages to become a purchaser of home equity loans, a move that could offer borrowers more favorable terms than those of private credit markets.

Public comments closed less than a week ago on the proposal, which is getting praise from low-income housing advocates and disapproval from bankers and Republicans.

The new rule, which would provide borrowers a cheaper loan option than cash-out refinancing, is specifically responsive to the higher interest rate financing environment that is putting the squeeze on the housing sector. Interbank interest rates currently sit at an effective 5.33 percent, their highest levels since 2001.

“In the current mortgage interest rate environment, a closed-end second mortgage may provide a more affordable option to homeowners than obtaining a new cash-out refinance or leveraging other consumer debt products,” the Federal Housing Finance Agency (FHFA) wrote in its proposal.

FHFA is the federal agency in charge of overseeing Freddie Mac — formally known as the Federal Home Loan Mortgage Corporation — and Federal National Mortgage Association, also known as Fannie Mae.

Fannie and Freddie each buy mortgages and package them into mortgage-backed securities, which are purchased by investors. The sales are intended to broaden the pool of Americans who can afford home loans and keep rates lower.

In a scenario comparing the new home equity loan proposal to a cash-out refinancing option, borrowers could save $136.77 in monthly payments as a result of the new product, FHFA said.

The new type of loan is the first time Freddie Mac or any of the government-sponsored enterprises (GSEs) that underpin the U.S. housing market have offered a fundamentally new type of product since they were nationalized as conservatorships in the wake of the 2008 financial crisis.

“We applaud Freddie Mac for its innovation and identifying a need in the market and seeking to create liquidity for a mortgage product other than a first lien mortgage loan,” Garth Rieman, a director of the National Council of State Housing Agencies, which advocates for low-income housing groups around the country, told the FHFA last week.

Rieman said the bounds of the new rule should be expanded, allowing for secondary loan amortization write-offs to extend throughout the course of the primary loan rather than cutting them off at a 20-year limit, as proposed.

Bankers and Republicans are against the new product proposal and fear it will cut into the business of the enormous private lending market. In 2022, there were $37.8 billion in secondary loan originations and $211.1 billion in maximum credit extended to borrowers, according to a 2023 study of the home equity loan market by the Mortgage Bankers Association, a trade group for home lenders.

“Government subsidization will not only enable the proposed product to offer terms that are economically impossible for private capital to match, but represents a vast (albeit indirect) expansion by the GSEs into these other credit markets,” Republican legislators including Sens. JD Vance (Ohio) and Mike Crapo (Idaho) as well as Reps. Warren Davidson (Ohio) and Blaine Luetkemeyer (Mo.) wrote to FHFA on Friday.

Several Democratic congressional offices declined to comment on the proposal, including those of House Financial Services Committee ranking member Rep. Maxine Waters (Calif.), and Senate Banking Committee Chair Sherrod Brown (Ohio). The White House also declined to comment, referring questions to FHFA.

Asked about precedents for the new product, its effect on private lending markets, and how exactly it will be securitized, the FHFA told The Hill on Tuesday that it is “reviewing comments from the public to inform our evaluation of this proposed new Enterprise product.”

“As with all activities FHFA considers, the safety and soundness of the [GSEs] and the mortgage finance system are fundamental requirements of any program,” the agency added.

Bankers blasted the secondary mortgage from Freddie Mac as unnecessary.

“The Freddie Mac proposal published by FHFA offers no data to support an assertion that the private market is not sufficiently meeting the demand for these second liens,” Joseph Pigg, senior vice president of the American Bankers Association, wrote to FHFA last week.

“While our members report growing demand for second liens, they have not raised concerns about insufficient capacity,” he wrote.

While FHFA says that resolution and loss-mitigation servicing for second mortgages would basically work as it does for first mortgages, private insurers are also against the proposal, arguing that it’s “duplicative of an already active private market, and raises important, unanswered questions,”said Seth Appleton, president of the U.S. Mortgage Insurers trade group.

Despite the pushback from bankers and insurers, one industry representative told The Hill that because it’s the first time the GSEs are offering a new product since the 2008 collapse of the banking sector, the move represents a first test of a new rulemaking process.

Accordingly, mortgage bankers are stressing that there are still a lot of unknowns about what’s going to emerge.

“What does Freddie Mac estimate base loan pricing will look like? Will pricing be equitable for lenders of all sizes?” Pete Mills, head of residential policy at the Mortgage Bankers Association, wrote to FHFA.

Amid higher interest rates and a concentration of consumer-facing inflation in the housing sector, housing agencies have shown some sensitivity to the pressures facing renters, tenants and mortgage holders.

In April, the Department of Housing and Urban Development put in place what amounts to a 10 percent rent increase cap for the low-income housing tax credit, a move that was hailed by tenant rights advocates.

PwC faces crisis in China over audit of failed property giant Evergrande
Role in approving accounts has led to infighting at Big Four firm as clients reconsider relationship

PwC is facing a crisis in China as partners brace for penalties over its audit of collapsed property developer Evergrande and some clients reconsider their relationship with the accounting firm.

China’s securities regulator ruled in March that Evergrande had inflated its mainland revenues by almost $80bn in the two years before the developer defaulted on its debts in 2021, despite PwC giving the accounts a clean bill of health.

Partners fear they could face one of the largest fines ever imposed on a Big Four accounting firm in China and other sanctions, prompting infighting among senior figures, according to insiders and retired partners still close to the firm.

PwC enjoyed success on the back of China’s property boom, but in the wake of Evergrande’s collapse and the property sector slowdown, the firm’s future business in the country has been clouded in uncertainty ahead of a leadership change.

The situation is “high stakes” for PwC China partners, said Francine McKenna, accounting lecturer at the University of Miami Herbert Business School. “The Chinese firms of the Big Four are also part of global networks, and many multinational firms operating in China count on them for audit, tax and advisory services.”

Partners believe possible regulatory action could eclipse the punishment handed to rival Deloitte last year for a “deficient audit” of China Huarong Asset Management. Deloitte paid a $31mn fine and its operations in Beijing were suspended for three months.

“The current partners are braced for impact,” said one former PwC partner.

Evergrande was one of China’s largest developers, and its collapse has sent shockwaves through the economy. Founder Hui Ka Yan faces a lifetime ban from public markets as a result of the March regulatory findings. PwC had audited the company since as early as 2009 before resigning in 2023.

Officials at Beijing’s finance ministry have discussed possible punishments for the firm’s failure to detect the accounting irregularities, including a large monetary penalty, the suspension or closure of some of PwC’s regional offices and curbs on auditing state-owned enterprises, according to a person briefed on the matter.

PwC China had eight central government-controlled SOE audit clients as of 2022, according to finance ministry data, accounting for about 6 per cent of revenue. Regulators reiterated last year that state-owned companies should not typically hire auditors that have received significant fines or other punishment within three years.

A director at a mainland-listed state-owned enterprise said its board in recent weeks discussed dropping PwC as its auditor if Beijing imposed heavy penalties. Last Friday, state-owned insurance group PICC said it had axed PwC as auditor after just three years, hiring EY instead.

The uncertainty has extended to PwC clients beyond SOEs. Shanghai-listed Eastroc Beverage cancelled a shareholder vote scheduled for last Friday that would have reappointed the firm as its auditor, saying it needed to “further verify related matters surrounding the accounting firm”.

“PwC China is co-operating with its regulators as it relates to any proceedings involving Evergrande,” the firm said, declining to comment further. China’s finance ministry did not respond to a request for comment.

Xue Yunkui, professor of accounting at the Cheung Kong Graduate School of Business in Beijing who sits on the boards of several listed companies, said officials were likely to weigh a severe punishment of PwC against the possibility of disrupting capital markets by taking action that destabilises the firm. “Everyone is waiting for guidance from the regulator,” he said.

PwC has the largest market share in China among the Big Four accounting firms, according to the finance ministry, with revenues of Rmb7.9bn ($1.1bn) in 2022. It has almost 800 partners and more than 20,000 staff in mainland China.


(...)

The letter claimed that Chao, then head of the firm’s audit business, had fought off an effort to ditch Evergrande as a client in 2014, when allegations of aggressive accounting first circulated and then-chair Silas Yang and other partners raised questions.

PwC China has previously said the letter contains “inaccurate statements and false allegations”. Chao declined to comment.

Yang, who hails from the old PwC Hong Kong side of the firm and retired in 2015 to become steward of the prestigious Hong Kong Jockey Club, also declined to comment when contacted by the Financial Times. His LinkedIn profile, however, contains some of his post-retirement thoughts in a comment on a video about EY in China.

“The profession is indeed facing many challenges. I’m only glad that I’m out of it now,” he wrote, going on to use an abbreviation for “troublesome practice matters”, the euphemism used internally at PwC for business that gets the firm into regulatory trouble.

“Luckily during my years, there were no TPMs! 🙏🏻🙏🏻,” he wrote.

Palma pone coto al turismo masivo: prohíbe nuevas viviendas de alquiler vacacional

Se suprimirán 4.000 plazas turísticas que están proyectadas
El Ayuntamiento propone restricciones a los cruceristas y a los coches de alquiler

Ofensiva de Palma contra la saturación turística. El Ayuntamiento de la ciudad balear ha presentado un paquete de medidas que busca minimizar el impacto que el turismo masivo está provocando en el territorio, especialmente en el ámbito residencial. El Gobierno local ha propuesto prohibir el alquiler vacacional en todo tipo de viviendas, limitar los 'megacruceros' y los coches de alquiler, y entre otras cosas, regular o registringir los grupos organizados de turistas.

"La presión turística que hay sobre Palma debe compensarse con limitaciones, con restricciones y, en algunos casos, con prohibiciones", ha dicho el alcalde Jaime Martínez, quien ha explicado que alguna de las medidas presentadas superan las competencias municipales, aunque espera poder llegar a acuerdos con el resto de instituciones. En el caso de las viviendas, la prohibición de aprobar nuevos alojamientos, que entrará en vigor a corto plazo, supondría eliminar hasta 4.000 plazas que estaban pendientes de autorización. En total, la ciudad cuenta con 50.000 plazas destinadas al turismo.(...)

Fed divergence: ECB officials confirm first rate cut next week

It is now nearly certain that the European Central Bank will lower interest rates before the Federal Reserve, bucking the trend of the U.S. central bank leading the way in terms of monetary policy.

ECB officials have all but confirmed that the first rate cut will happen at its meeting next week, as inflation has moved closer to its 2% target. Eurozone inflation held steady at 2.4% in April, staying below 3% for the seventh month in a row. Data for May will be out Friday.

Olli Rehn, member of the ECB Governing Council and head of the Bank of Finland, said inflation was easing in a sustained way, "and the time is thus ripe in June to start cutting rates."

Another ECB policymaker, Francois Villeroy de Galhau - also the governor of France's central bank - said the first reduction next month is a "done deal." "After the first two rate cuts, our monetary policy will remain restrictive. We are still actively fighting inflation until we reach the neutral rate."

ECB's chief economist Philip Lane told the Financial Times that there is enough data to support to remove the top level of restriction, "barring major surprises."

"It seems to me that a fairly general consensus has emerged on the possibility of a rate cut," said Fabio Panetta, the Bank of Italy's governor and ECB policymaker.

Markets are betting on a 25-basis point rate cut from the ECB next week and no reduction at its meeting in July. "We expect the ECB to hold rates steady in July, before delivering another 25 bps rate cut in September," said Wells Fargo economist Nick Bennenbroek.

EU Nears Deal on Failed Lenders in Path to Closer Banking Ties

Agreement by governments could come as soon as next month
German reservations have largely been addressed, sources say

The European Union is nearing a deal on measures that would make it easier to wind down smaller lenders that run into trouble, according to people familiar with the matter.

Governments may reach a deal on the crisis management and deposit insurance framework next month after addressing some concerns of countries including Germany, said one of the people, who asked to remain anonymous as an agreement has yet to be reached. Talks to hammer out the details together with other European authorities will probably continue into next year, they said.

Such a move would be a key step to regain momentum in deadlocked talks over forging closer banking ties in the region and ultimately facilitate cross-border bank mergers.

European banking fractured along national lines after the 2008 credit crunch and efforts to put in place the architecture needed for a truly unified market ran out of steam in recent years. The package that governments are set to agree on is commonly-viewed as a key step toward deeper and even thornier reforms such as a system of joint deposit insurance like the one that exists in the US.

France and Germany have recently sought to revive the issue of banking ties. The two countries’ leaders — Emmanuel Macron and Olaf Scholz — are discussing the matter during a state visit this week.

Last year, the EU’s executive arm suggested tapping national deposit protection funds to bridge gaps at failing banks that don’t have sufficient reserves of their own. Germany’s mass of smaller savings and cooperative banks slammed the plan, saying it would undermine the systems they have in place to protect savers.

Germany still has reservations on the use of such funds because it could weaken rules on forcing losses on a failed bank’s investors, said one of the people. Still, a deal is likely because negotiators are set to agree on strict conditions for when a bank that runs into trouble is sent into resolution, rather than being wound down under national insolvency laws, they said.

While the talks have been cumbersome, discussions on pooling deposit insurance are likely to be even more difficult. A related plan approved by a committee of European lawmakers in April drew swift criticism from German bank lobbyists.

German officials say the banking union isn’t just about deposit insurance and that work is needed in other areas, such as rules that would address banks’ large holdings of bonds issued by governments in their home markets.

While Novo Nordisk charges $1,349 a month for Wegovy in the U.S., the drug costs just $140 a month in Germany and $92 a month in the U.K.

Novo Nordisk has blamed middlemen in the U.S. healthcare system for the high prices of its top-selling weight-loss drugs Wegovy and Ozempic, following the launch of an investigation into the drugs led by U.S. Senator Bernie Sanders.

In a letter to the Senator for Vermont, the Danish pharmaceutical giant said it only retains 60% of the list price on both drugs, with the rest paid out to middlemen.(...)