Actions by central bankers appear to have stunned the second-quarter decline, for now, at least in the U.S. The number of American households behind on mortgage payments or in foreclosure rose slightly in the second quarter from the first but was still lower than last year, offering the latest sign of the economy’s uneven recovery from the housing collapse.

Conversation Starter

Bankrate: More Modest Movement for Mortgage Rates
NEW YORK, Aug. 9, 2012 /PRNewswire/ — Mortgage rates moved only slightly this week, with the average rate on the benchmark 30-year fixed mortgage rising for the second consecutive week, to 3.81 percent according to Bankrate.com’s weekly national survey.

The average 30-year fixed mortgage has an average of 0.44 discount and origination points.

The average 15-year fixed mortgage rate inched higher to 3 percent while the larger jumbo 30-year mortgage reversed course from last week, settling back at 4.38 percent.

Adjustable mortgage rates were all over the map, with the 1-year ARM moving down to 3 percent, the 3-year ARM moving up to 2.98 percent, and the 5-year adjustable holding steady at 2.91 percent.

A better than expected jobs report for the month of July put a floor under bond yields and mortgage rates this week. With investors no longer feeling as if the sky is falling, at least temporarily, fixed mortgage rates did move a tad higher. Mortgage rates are closely related to yields on long-term government bonds. Should the better economic news continue, it would keep further Fed stimulus at bay, and likely push up rates a bit more, so stay tuned.

The last time mortgage rates were above 6 percent was Nov. 2008. At the time, the average 30-year fixed rate was 6.33 percent, meaning a $200,000 loan would have carried a monthly payment of $1,241.86. With the average rate now 3.81 percent, the monthly payment for the same size loan would be $933.05, a difference of $308 per month for anyone refinancing now.

Bankrate’s national weekly mortgage survey is conducted each Wednesday from data provided by the top 10 banks and thrifts in the top 10 markets.

**CN: And more on mortgages and housing:

30-year-mortgage rate increases to 3.59%
MarketWatch
The 30-year fixed-rate mortgage average rose to 3.59% in the week ending Aug. 9 from 3.55% in the prior week, Freddie Mac said Thursday in its weekly report. The rate was 4.32% a year earlier, according to Freddie, a buyer of residential mortgages.
http://jlne.ws/MBgTb1

Mortgage Delinquencies Rose in Second Quarter
WSJ.com
The number of American households behind on mortgage payments or in foreclosure rose slightly in the second quarter from the first but was still lower than a year ago, offering the latest sign of the economy‘s uneven recovery from the housing bust.
http://jlne.ws/NlGlUc

Housing regulator warns about ‘eminent domain’ use
MarketWatch
The regulator for government-seized mortgage giants Fannie Mae and Freddie Mac on Wednesday warned against the use of so-called eminent domain to restructure home loans.
http://jlne.ws/OTnSOF

SIFMA Shares FHFA Concerns with Use of Eminent Domain to Restructure Mortgages
SIFMA today released the following statement from Kenneth E. Bentsen, Jr., executive vice president for public policy and advocacy, after the Federal Housing Finance Agency (FHFA) released a notice for comment on the proposed use of eminent domain to modify existing mortgages in private label security pools.
http://jlne.ws/No6VKW

Fannie Mae swings to profit on credit benefit
MarketWatch
Fannie Mae swung to a second-quarter profit after booking a large benefit for credit losses, the latest sign the housing market is making tentative steps toward a recovery.
http://jlne.ws/QGyXFS

Lead Stories

Central Banker’s Tactics Seem To Have Halted The Second-Quarter Swoon In The U.S. For Now
The Economist
There is a central bank put across the economy, such that markets know to expect action under certain circumstances and respond by placing a floor under sagging markets. These open-mouth operations seem, for now, to have halted the second-quarter swoon, in America at any rate.
http://jlne.ws/OSUISg

Economists React: One Step Forward After Three Steps Back
WSJ.com
Economists and others weigh in on the gain in jobs in July and the rise in the unemployment rate.
http://jlne.ws/PrYjCl

Americans Cut Their Debt
Federal Reserve Bank of Cleveland – Economic Commentary
The Great Recession brought an end to a 20-year expansion of consumer debt. In its wake is a lively debate about what caused the turnaround. Was it motivated by a decreased appetite for debt by consumers or an unwillingness to lend by banks? Our analysis of Equifax and Mail Monitor data shows that the major cause was most likely consumers.
http://jlne.ws/NjWvNZ

There’s a 15% chance of falling off ‘fiscal cliff,’ J.P. Morgan says
MarketWatch
Congress isn’t really going to let the so-called fiscal cliff — the planned tax hikes and spending cuts that will be triggered at the end of the year if no action is taken — be triggered, will they? According to a note published by J.P. Morgan, there’s a 15% chance they will.
http://jlne.ws/QcArDp

More Than 50% of Poll Respondents Expect Economy to Get Worse
WSJ.com
Consumer spending in the U.S. continued to decline during July as consumer sentiment about the economy waned and expectations about personal finances were unchanged, according to Discover Financial Services’ U.S. Spending Monitor.
http://jlne.ws/RqiuFD

One Key Group That’s Not Worried About U.S. Debt
NPR
It’s been a year since Standard and Poor’s downgraded U.S. government debt. The downgrade touched a nerve. It played into the narrative of American decline, of an irresponsible nation spending beyond its means.
http://jlne.ws/MYXRB9

College Debt Hits Well-Off
WSJ.com
Rising college costs and a sagging economy are taking the biggest toll on a surprising group: upper-middle-income families.According to a Wall Street Journal analysis of recently released Federal Reserve data, households with annual incomes of $94,535 to $205,335 saw the biggest jump in the percentage with student-loan debt from 2007 to 2010, the latest figures available. That group also saw a sharp climb in the amount of debt owed on average.
http://jlne.ws/MC1zRi

How Bad Could EU Crisis Get? IMF Attempts an Answer
WSJ.com
Seriously, how bad could it really get? No one knows what the full impact could be, but the International Monetary Fund has tried to guess. Failure of euro-zone policy makers to tame their growing debt crisis would likely trigger a severe regional economic contraction, force a fire sale of financial-industry assets and trim the growth prospects of major world economies by several percentage points, the IMF says in its 2012 Spillovers Report.
http://jlne.ws/RcrLRu

Former ECB Chief Economist Warns Against Trying to Blackmail Germany With History
Germany’s guilt over the Second World War doesn’t oblige it to write blank checks to euro-zone countries that fail to reform their economies, said former European Central Bank executive board member Otmar Issing. Mr. Issing served as a member of the ECB’s Executive Board from 1998 to 2006. A German, he remains an influential voice on economic and central bank matters in his home country.
http://jlne.ws/OXEKUn

Draghi stalked by the ghost of Bundesbank past
MarketWatch
Mario Draghi is a central banker with the brain of a nuclear scientist and the eyes of a medieval pope. He heads the European Central Bank, a modern-day monastic order with both spiritual and earthly powers. The perfect repository for his considerable skills.
http://jlne.ws/N9uMkL

Don’t get suckered by the Draghi put
MarketsWatch
They may well go down as the six most infamous words in the short history of the euro. “Believe me, it will be enough,” European Central Bank President Mario Draghi told an investment conference in London last month as he pledged to do whatever was necessary to keep the euro together.
http://jlne.ws/OSpEzH

Bank scandal gives UK economy £5bn boost
http://jlne.ws/Q64YTr

Greek Central Banker Says Country Being ‘Defamed’
Reuters
Greece’s central bank governor George Provopoulos told parliament on Friday the Greek banking system was well regulated, otherwise it would have collapsed.
http://jlne.ws/Nfcknr

Fed Loan Survey Finds U.S. Banks Ease Lending Standards
WSJ.com
U.S. banks eased their lending standards for loans to large- and medium-sized businesses along with auto loans and credit cards on strong demand in the second
quarter, but remained wary of the home-loan market, the Federal Reserve said Monday.
http://jlne.ws/OHY4Y9

Ben Bernanke’s Dad, Retired Pharmacist ‘Dr. Phil,’ Dies
WSJ.com
Federal Reserve Chairman Ben Bernanke‘s father, a retired pharmacist, died Wednesday. Philip Richard Bernanke died at the age of 85 in Charlotte, N.C., according to an obituary in the Charlotte Observer. Fed officials confirmed that he was the father of the Fed chairman.
http://jlne.ws/ONIaZC

***CN: “Dillon had very few doctors at the time, so a lot of people came to my dad and uncle for advice on basic health matters,” said Mr. Bernanke, who also helped out at the drugstore. “I remember working in the store as a boy, or, as Uncle Mort likes to remind me, avoiding work by hiding out by the comic-book rack.”

Are California Munis Paying Loan Shark Rates?
CNBC
This is a truly astounding story: San Diego’s Poway school district is paying $1 billion to borrow $105 million. And it may not be alone in San Diego or the state paying loan shark rates.
http://jlne.ws/RRyaip

Bank scandal gives UK economy £5bn boost
http://jlne.ws/Q64YTr

What Libor Means for You
WSJ.com
As regulators investigate whether banks rigged a key interest rate, some of the biggest losers—and winners—might be consumers. Global banks stand accused of manipulating the London interbank offered rate, or Libor—a scandal that has ensnared at least 16 financial institutions. The British bank Barclays BCS +2.72% in June paid more than $450 million to settle allegations by U.S. and British authorities that its executives and traders had rigged Libor.
http://jlne.ws/MZ59VG

Flying With Milton Friedman Is a Trip Unto Itself
Bloomberg
As I was leaving the house last Friday for a full day of travel, I wanted something to read during airport holdovers and almost-certain delays. My only prerequisite was that the book be small enough to fit in my purse. Whether I grabbed Milton Friedman’s “Capitalism and Freedom” because of recent tributes to the Nobel laureate — he would have turned 100 on July 31 — or because of the book’s compact size, I can’t say. But I’m glad I did.
http://jlne.ws/NlTCw2

Fed should buy as many bonds as necessary: Rosengren
Reuters
A top Federal Reserve official said on Tuesday the Federal Reserve should launch another bond-buying program of whatever size and duration is necessary to get the economy back on its feet, signaling support from some U.S. policymakers for aggressive steps to boost the flagging recovery.
http://jlne.ws/Mi5eT0

Events

Bond China Congress
September 4-5, 2012, Shanghai, China
http://jlne.ws/KXsmS0

CTA Expo Chicago
September 13, 2012
http://jlne.ws/LmhfFu

Economic News

Business Is Booming in Empirical Economics
Bloomberg
Many had pronounced the field of economics discredited after the global financial crisis. Instead, it’s in the midst of a revolution. The transformation isn’t a mea culpa, or a knee-jerk reaction to the crisis. Rather, it’s a long-running shift toward a more empirical field, to the study of what hard data can tell us about the way the world really works.
http://jlne.ws/NZWAdd

US Employers Post the Most Jobs in 4 Years
ABC News
U.S. employers posted the most job openings in four years in June, a positive sign that hiring may pick up. The Labor Department said Tuesday job openings rose to a seasonally adjusted 3.8 million in June, up from 3.7 million in May. That’s the most since July 2008. Layoffs fell.
http://jlne.ws/TcAOln

June consumer credit up for tenth straight month
MarketWatch
U.S. consumers increased their debt in June by a seasonally adjusted $6.5 billion, the Federal Reserve reported Tuesday. This is the tenth straight monthly gain in consumer borrowing. The increase in June was not as strong as the roughly $10 billion gain expected by Wall Street economists.
http://jlne.ws/S1aTLa

Wholesale Inventories Drop
Inventories at U.S. wholesalers fell slightly in June as the value of petroleum stockpiles plunged. U.S. wholesalers’ inventories decreased by 0.2% from the prior month to a seasonally adjusted $481.91 billion, the Commerce Department said Thursday. Economists surveyed by Dow Jones Newswires had forecast a 0.3% gain.
http://jlne.ws/QQmQbH

Hiring picks up but not enough to sideline Fed
Reuters
Employers hired the most workers in five months in July, but an increase in the jobless rate to 8.3 percent kept prospects of further monetary stimulus from the Federal Reserve on the table.
http://jlne.ws/N418xk

U.S. Trade Gap Narrows
WSJ.com
The U.S. trade deficit in June narrowed to its lowest level since 2010 as exports reached a record level and imports declined due to sliding oil prices. Separately, the number of U.S. workers filing applications for jobless benefits fell slightly last week, suggesting that the labor market is stabilizing.
http://jlne.ws/O6GjQW

Exchanges, Clearing Houses & MTFs

NYPC Announces Expansion of Cross-Margining to Market Professionals
Press Release
New York Portfolio Clearing, LLC (NYPC), a unique clearing platform for fixed income derivatives, announced today the expansion of its “one-pot” cross-margining platform to a larger pool of market professionals, following approval from the Commodity Futures Trading Commission and the Securities and Exchange Commission.
http://jlne.ws/RttO3H

Firms & Banks

Don’t Overreact to This Knightmare
WSJ.com
“Our trading activities expose us to the risk of significant losses.” This formulaic line in Knight Capital Group’s annual regulatory filing is filled with foreboding. The securities broker, like many firms before it, didn’t expect that a ritual warning in its yearly paperwork would turn into a real-life drama—a crazy half-hour during which erroneous trades from Knight’s balky computers flooded the stock market and caused a $440 million loss.
http://jlne.ws/MoOLrt

Knight Capital receives $400m infusion
FT.com
The Securities and Exchange Commission would require trading firms and other market participants to disclose system failures and test computer-code changes before they go live under rules being developed in light of the software glitch that forced the $400m bailout of Knight Capital, people familiar with the matter said. http://jlne.ws/MYYgnh

Knight Capital Gets a Lifeline
WSJ.com
Knight Capital Group Inc. told Wall Street brokers on Friday morning that the battered securities firm obtained a credit line allowing it to operate for the day, according to people familiar with the matter. However, several major retail brokerages Friday still weren’t sending business to the firm.
http://jlne.ws/NqCfI5

SEC’s Schapiro:Knight Capital trade ‘unacceptable’
MarketWatch
Securities and Exchange Commission Chairman Mary Schapiro on Friday said that while the erroneous trading at Knight Capital Group Inc. KCG +56.98% leading to a $440 million loss is “unacceptable,” the agency has taken steps recently to limit its impact.
http://jlne.ws/N8v3CJ

Knight Rides to Rescue of Law Planned To Regulate High-Frequency Trading
WSJ.com
The Knight Capital fiasco, a case of algorithmic trading gone wrong, comes as European Union policy makers take aim at the growing industry — and it couldn’t come at a better time for those gunning to weaken it.
http://jlne.ws/Qi3R3h

Rival Citadel Bid for Knight
WSJ.com
Citadel LLC made a rival $500 million loan offer to its competitor Knight Capital Group Inc. on Sunday, hours before Knight finalized a $400 million recapitalization by a group of investors, people familiar with the discussions said.
http://jlne.ws/PFp9Hd

Omgeo names DTCC’s Andrew Gray chairman of the board
Omgeo, the global standard for post-trade efficiency, today announced that Andrew Gray, Managing Director of Core Business Management for DTCC, has been named its new Chairman of the Board.
http://jlne.ws/Nh6Xpk

Deutsche Bank Is Stuck on RREEF
BY CRAIG KARMIN AND LAURA STEVENS – WSJ
Deutsche Bank AG’s on-and-off effort to sell its giant real-estate fund group is taking its toll on one of the world’s largest property-investment businesses.
http://jlne.ws/Rp1XSh

Barclays expects Citi to book $6B charge in 3Q
Associated Press via Yahoo! News
A Barclays analyst projects that Citigroup Inc. may book a charge of up to $6 billion in the third quarter related to its stake in the retail brokerage Morgan Stanley Smith Barney, which it owns with investment bank Morgan Stanley.
http://jlne.ws/Rp1XSp

RBS’s CEO Blames Libor-Manipulation on ‘Handful’ of Individuals
Bloomberg
Royal Bank of Scotland Group Plc Chief Executive Officer Stephen Hester sought to limit the damage from the Libor-rigging scandal, blaming a “handful” of employees for attempting to manipulate the benchmark rate.
http://jlne.ws/RprSX6

RBS woes no argument for nationalization
FT.com
Something must be done. This is something, therefore it must be done. You can see how the idea of the complete nationalisation of Royal Bank of Scotland could drift on to the agenda of the coalition government. Despite the overwhelming public ownership of RBS, it is clearly not behaving as an arm of the state.
http://jlne.ws/OFZxvE

Ex-UBS Traders Offered Deal by U.S. in Rate Probe
WSJ.com
U.S. prosecutors have agreed to shield several former UBS AG employees from criminal charges in return for their cooperation with the escalating investigation of suspected interest-rate manipulation, according to a person close to the probe.
http://jlne.ws/Na3pck

U.S. to sell $4.5 billion in AIG stock
Reuters
The U.S. Treasury Department said on Friday it will sell $4.5 billion worth of American International Group (AIG.N) stock, taking another step toward unwinding its position in the financial crisis bailout programs.
http://jlne.ws/ONX0TH

Now, It Is Man vs. Machine for Morgan Stanley Bond Trading
WSJ.com
In a move to repair its flagging bond-trading business, Morgan Stanley is scrambling to replace some of its well-paid bond traders with computers. The New York company is hiring programmers and technology specialists to help it trade bonds electronically and handle client orders in the hope of exploiting an expected shift in the way bonds and other fixed income products are traded.
http://jlne.ws/Na31dI

Regulators

Basel III and Cleared Derivatives: “The Bark was Worse than the Bite”
MRV Associates
The Basel Committee on Banking Supervision just published guidance on risk weighting cleared derivatives and other guidance for clearing with a Central Clearing Party (CCP). The requirements are a lot less onerous for banks than they had anticipated; hence, market participants can expect that banks will increase the speed at which they are gravitating
to use CCPs. In this third piece in a series, Mayra Rodríguez Valladares explores the implications of how Basel III will influence banks’ derivatives trading and CCPs’ growing role in the derivatives world.
http://jlne.ws/Ow9TOl

Lacker says Fed rate hike could come before late 2014
Reuters
The Federal Reserve may need to raise official interest rates before late 2014, Richmond Fed President Jeffrey Lacker said on Friday, justifying his dissent against the central bank’s latest decision.
http://jlne.ws/RiRWHH

Treasury’s John Cross Named Head of SEC New Muni Office
The Bond Buyer
The Securities and Exchange Commission has named John J. Cross, 3rd, the head of its Office of Municipal Securities.
http://jlne.ws/NdoQ74

Global News

Bundesbank’s Printing History
WSJ.com
How times change. The mighty Bundesbank is implacably opposed to bond purchases by the European Central Bank. But economists at BNP Paribas have dug through the historical archives to unearth a rather different German central bank.
http://jlne.ws/Td98wN

BOE: Lending Plan Could Boost Bank Profit
WSJ.com
The U.K.’s new flagship program to coax banks to lend more to households and businesses could result in banks using the cheap central bank funds to boost their profits rather than passing on lower lending rates to the broader economy, the Bank of England said Wednesday.
http://jlne.ws/No8sAs

New Investment Products in China Raise Fears of Collapse
The New York Times
The Chinese investment vehicle known as Golden Elephant No. 38 promises buyers a return of 7.2 percent per year. That is more than double the rate offered on savings accounts in China.
http://jlne.ws/RtyS9V

Chinese firms, investors building up dollar assets
Want China Times
Chinese enterprises have increased their assets in the US dollar on the strengthening of the greenback against most currencies and the anticipation of a weakening renminbi.
http://jlne.ws/Nmi3Ib

Spain’s Rajoy Hints Bailout a Possibility
WSJ.com
Spanish Prime Minister Mariano Rajoy opened the door—slightly—to requesting support from the euro-zone bailout fund to help ease Spain’s deepening financial crisis.
http://jlne.ws/Rid3Kk

Christine Nielsen
Managing Editor
John Lothian News

Email – christine.nielsen@johnlothian.com
MarketsWiki – http://jlne.ws/AzHiaYI

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