Mixed Bag of Housing Numbers
The fall-like weather in the middle of summer has continued yet for another day in St. Louis, not that I’m complaining, but that out-of-the-ordinary trend certainly hasn’t carried over to the currency markets. In fact, I could probably cut and paste yesterday’s Pfennig and you wouldn’t miss a thing as the currencies traded in a very tight range, so there wasn’t much exciting to report. Oh well, instead of wasting space, I’ll get right to it.
As Chris reported, it’s been a relatively quiet week in the economic report department here in the US, but we did have some housing data as the MBA mortgage application and May’s home price index figures were released yesterday. Both measures were positive but obviously far from what would be considered knights in shining armor. Mortgage applications did rise for a third consecutive week, 2.8% over the previous, but was lower than last week’s figure of 4.3%. Falling prices are making properties more affordable, but record foreclosures and surging unemployment are impacting more and more Americans as the uncertain future is forcing those who can, refinance, instead of testing the real estate market. Economists expect prices to continue to fall as sales of distressed properties (of which more than 1.5 million received a default/auction notice or were seized by the bank so far this year) act as an anchor preventing much in the way of improvement.
Speaking of home prices, May’s number showed the smallest annual drop in 10 months as prices declined 5.6% year over year and actually rose by 0.9% from April, but every region of the US still saw declines in May from a year earlier. Former Fannie Mae economist, Thomas Lawler, was quoted as saying, “The distress in the housing market was not caused by unemployment, but now we are seeing a wave of delinquencies and foreclosures by people who, if they had kept their jobs, would be unlikely to default.” It appears that he shares our view in that as unemployment continues to rise, pressure on a sustained recovery will continue to mount. I agree with those that say the real estate market is improving…the numbers are not as bad as what we’ve seen in the past, but the bottom line is that prices are still falling…not exactly what I would consider a recovery just yet. Until we see unemployment fall to a sustainable number and the fear of layoffs along with job cuts subside, I just don’t see enough consumers rushing out and putting themselves on the line for their most expensive purchase…a home.
I guess this leads me to the reports due out today as we see the weekly jobless numbers and existing home sales for June. Although the initial jobless claims and the continuing claims are both expected to come in worse than last week, the existing home sales are estimated to show a bit of an increase. The trading pattern that has been in place for a while now, that being good news for the US causes dollar selling and bad news leads to buying of the dollar, shouldn’t see any deviation as risk aversion remains in control. Assuming my crystal ball is plugged in, any improvement in these numbers would send the dollar down today if investors get that warm and fuzzy but according to most economists, not much in the way of surprises one way or the other would be in the cards.
Chuck forwarded some comments made by Stephen Englander, chief currency strategist at Barclays, emphasizing that the dollar is expected to weaken as considerable skepticism about US monetary policy mounts from foreign investors. Without further ado, here’s Chuck…
“Here’s something I came across that plays well with what I’ve been telling you all for years now… Let’s listen in first, and then review what I’ve said over and over again.
“‘[Bernanke] provided a very clear discussion as to what the mechanics of pulling out would be, but I don’t think that’s the question the market is asking,’ Englander said. ‘Until there’s a clear path to withdrawing from the quantitative easing, we’re going to see foreign investors demanding a risk premium, if not on U.S. interest rates, then on a weaker dollar to equalize expected returns between U.S. assets and foreign assets.’
“Sound familiar? Of course it does! I’ve said over and over again through the years that when a country has a financing problem it has two choices… It can raise interest rates on the bonds they sell, risking the awful affect on their economy… OR… They can devalue the currency, thus making it cheaper to buy the bonds used to finance the deficit… In this case… It’s the dollar… And any government would always choose the devaluation of the currency over wrecking the economy… Wrecking the economy doesn’t get them re-elected!”
Obviously, the broad expansion of the deficit has become a huge topic for not only foreign investors, but also those of us right here in the US. Here’s another note Chuck sent last night for me to share with you all:
“I have a friend who has been the leading doctor in the attempt to discredit the National Health Care Plan… I heard last night that the President said that if we didn’t implement National Health Care we wouldn’t be able to deal with our deficits…
“That’s a bunch of malarkey! Here’s my good friend, Dr. Dave…
“‘The underlying method of cutting costs throughout the plan is based on rationing and denying care NOT PREVENTING health care need. The plan’s method is the most inhumane and unethical approach in cutting costs. The rationing of care is implemented through The National Health Care Board, according to the plan. This illustrious Board “will approve or reject treatment for patients based on the cost per treatment divided by the number of years the patient will benefit from the treatment.” Translation… If you are over 65 or have been recently diagnosed as having an advanced form of cardiac disease or aggressive cancer… Dream on if you think you will get treated. Pick out your box. Oh you say this could never happen? Sorry… This is the same model they use in Britain.’
“So… You can side with the President, speaker Pelosi, and others when they try to jam this down the throats of Americans… Or you can side with a doctor that has fought against this from the beginning because of the inhumane way it treats American citizens in need of health care!
“I’m not one to make this letter political… But trust me on this, the gauntlet has been put before us, and we can decide if we want additional spending or not… Because no matter what the President says, once Congress gets a hold of a bill, the costs multiply by tens! If not hundreds! And we are in no position, as a country, to take on additional deficits!”
The foundation for a longer-term weak dollar has been in construction for quite some time and the current fundamentals and now policies appear to be opening the eyes of many worldwide. The currency market seems to have taken notice as we have established a fairly strong base in many currencies. For instance, the euro has been comfortably trading close to the 1.40 handle, give or take a couple cents on either side, for a couple of months now. I look back to the end of 2004 when the euro was setting record highs at 1.35-1.36 and thinking then that prices at 1.40 would be a moon shot. Fast-forward to today and 1.40 is kind of seen as ho-hum. I guess the point I’m trying to make here is even though we saw considerable dollar strength in the second half of last year, we have settled in a spot where if we do see another considerable selling run of the dollar, look out.
As I touched on earlier, the currency market was a non-event yesterday as most currencies traded within a range of 0.25% to the dollar but the rand (ZAR) was again the winner of the day. The rand gained another 1.25% as money is still flowing into the South African market from investors seeking higher yield. This is one of the more volatile currencies, so extreme caution and an iron stomach are needed. There is not any middle ground for the currency so extreme movements up and down are the norm.
Speaking of another high yielder, Brazil’s central bank slowed the pace of rate cuts by only dropping 0.50% to a record low of 8.75%. They had cut rates by at least one full point following the four policy meetings so far this year and cited these reductions have had enough impact to warrant a smaller cut. This outcome has economists thinking rates may be at the bottom and some even see rates at 10.5% by next July if inflation begins to creep higher. Lower borrowing costs and taxes as well as increased government spending has supported domestic demand so far, causing the OECD to call for a 4% gain in GDP next year.
With not much else currency wise, I came across yet another story promoting the commodity currencies. As China’s demand for raw materials continues to feed infrastructure growth, currencies such as Australia (AUD) and Canada (CAD) would stand to be direct benefactors. The biggest provider of pension plans in Australia has called for the loonie to once again hit parity and the Aussie to float up to the 90 handle. I don’t disagree with that assessment as commodity-rich countries and those with sound fundamentals will be in a much better starting position than most, but only time will tell. Interest rate differentials should also come back into play, especially if the US keeps rates where they are for an extended period of time. Guess which countries are the ones discussing rates hikes for next year…yep, it’s several of the commodity currencies.
I’ll leave you today with the second installment from our big boss, Frank Trotter. Let’s see what Frank has to say:
“It is still beautiful here in Vancouver. In the vertical downtown, with steel and concrete building, architects have gone to extreme lengths to add water follies – waterfalls, streams, pools and trickles to tie the outdoors into the bustling downtown. Fifteen minutes away by ferry and bus we entered the forest at the salmon hatchery and walked down along the stream, across the Lions Gate Bridge and back to reality. While we walked the US dollar continued to trickle downhill as Mike surely will report. While the crystal ball is a bit clouded it’s hard for me to see anything but decline for the next 3 -5 years.”
Sounds like everyone is on the same page to me…