Back to School Housing Numbers

Yesterday started out like any other quiet morning so far this week, but we did see a nice little run in the currencies only to see profit taking as we moved into the late afternoon. As I turned on the computer screens this morning, I see where the overnight markets brought us right back up to the levels we began with this time yesterday. The big story that moved the markets was the better-than-expected housing numbers that, again, gave investors that warm and fuzzy feeling that I touched on yesterday. Since I already let the cat out of the bag, I’ll jump right in…

Sales of existing homes rose for a third consecutive month in June to an annual rate of 4.89 million, which was better than the forecast of 4.84 million that most economists were expecting. May’s figure was actually revised down to 4.72 million from the original posting of 4.77, so the month on month rise came in much higher at 3.6% than the expected 1.5% increase. June is traditionally seen as one of the busiest months in the real estate market as families try to make the adjustment in between school years, so it wasn’t exactly a surprise to see better-than-expected numbers.

Lower borrowing costs, foreclosure driven price declines, and tax incentives also contributed to these higher numbers. This is certainly good news to hear and I hope the bottom has already passed us by or is near, but as I mentioned yesterday, I won’t get too excited until unemployment gets back to a supportive level and the full backing of the consumer underpins this move. If anything, this may end up being a protracted bottom and a slow road to normalized levels.

We also had the weekly initial jobless and continuing claims released yesterday, but they were overshadowed by the positive housing numbers that came out. The initial jobless figure came in 30,000 higher than last week to 554K but continuing claims backed off a bit to 6.23 million from last week’s revision up to 6.31 million. Bernanke said earlier this week that job insecurity, together with declines in home values and tight credit, is likely to limit gains in consumer spending. With that being said, it still looks like we have plenty of breakers to get through before we reach the safety of calmer waters.

Today doesn’t bring us much in the way of reporting as the only data due out is the final printing of the U. of Michigan consumer confidence number for July. The preliminary figure was released a couple of weeks ago and fell more than forecast to 64.6 from June’s 70.8 reading. This generally isn’t a big market mover but its expected to settle in a tad higher at 65. This one is a tough call as the stock market has risen quite a bit in that time period but we’ll see if job and income concerns keep this month’s number grounded. Since this is all we get today, it will be interesting to see how much attention the markets give this report.

Just as we saw the Dow hit the 9000 mark for the first time since January and the euphoria of the housing market has gained momentum, well-respected economist Nouriel Roubini had a different take on things. In a report released today, concern was expressed that a perfect storm of fiscal deficits, rising bond yields, soaring oil prices, weak profits, and a stagnant labor market could blow the recovering world economy back into a double dip recession. He went on the to say that its getting more likely unless a clear exit strategy from the massive monetary and fiscal stimulus is outlined even before it is implemented. I guess the moral of the story here is to proceed with caution and buckle your seatbelt because the ride could get bumpy.

Moving on to currencies, the Swedish krona (SEK) and the Canadian dollar (CAD) both posted 1% gains yesterday while the Japanese yen (JPY), New Zealand dollar (NZD), and Swiss franc (CHF) rounded out the bottom. The two currencies at the top of the list had much different reasons for ending the day where they did as the krona traded higher primarily on the back of risk appetite. As investors feel more comfortable with buying riskier assets, the thinner traded currencies like the krona benefit even though Sweden’s unemployment rate rose for a second month in June to 9.8%.

The Canadian dollar, on the other hand, rose to a 7-week high as the central bank said the recession is nearing an end brought on by higher commodity prices and consumer confidence. The central bank kept rates at the record low of 0.25% a couple of days ago and reiterated that they will stay there for a while unless inflation becomes a problem. Since Chuck is across the border in Canada right now, it’s a perfect time to get our daily dose:

“I was reading the local paper the other day, and the business section had a big story on the Bank of Canada’s (BOC) Governor Carney and how he vows he will intervene to keep the loonie from going higher. In the last two days since that story appeared, the loonie has done nothing but gain versus the green/peachback… it traded through 91-cents, yesterday! I can’t help but think that traders are beginning to believe that Central Bankers are imitating the “boy who cried wolf”… We had the Brazilian Central Bank, the Swiss National Bank, and now the BOC… They all are giving verbal warnings about traders taking their currencies higher.

“The Central Bankers do this under the disguise of ‘we don’t want deflation in our economy’ opting for the weaker currency to introduce inflation… I think this is all a smokescreen! I think this is a coordinated effort to keep their currencies from going hog-wild versus the dollar… The Central Bankers all know that the dollar is teetering, and without speed bumps we could see a mad exit for the door for dollar holders. Just what I think… Nothing more, nothing less… Just my thoughts…”

Thanks again Chuck, its always great to get your insight. Since we’re already talking about central bank intervention, I saw a report today that has some looking for the Swiss National Bank getting back into the game. According to the Big Mac index, which is a purchasing power parity figure using the cost of a Big Mac as the measure, the Swiss franc is the second most expensive in Europe. Its just a fun little tid bit I thought would be good to break the monotony. Anyway, the Swiss franc is largely influenced by the euro (EUR) and risk appetite so while the SNB may step in, there’s really no way to stop the moving train. As Chuck has said many times before, the markets have much deeper pockets than a central bank.

As I got to the office yesterday, the euro was hovering around 1.42 and climbed just shy of 1.43 to 1.4291 before we saw the profit taking drag it down to 1.4150 on my way out the door. I saw a report where the euro had established a base at 1.4050 and calls to buy on dips, which is certainly a strategy that would be consistent with our views. As I touched on above, the Asian and overnight markets have run things right back to the levels from yesterday but as the European traders hand the books to those in New York before heading out for the weekend, the dollar is still getting sold. Don’t look now, but I see the euro at 1.4250… Hopefully we can hold on to this and finish the week on a positive note. It looks like the euro is also getting some help from within as reports showed the contraction in European manufacturing and services slowed more than expected and German business confidence improved.

While I’m talking about Europe, we had some positive new come out of the UK as retail sales quadrupled the estimate and surprised the markets with a June gain of 1.2%. Year over year sales are actually up 2.9% and has economists looking for a near zero GDP figure in the second quarter. HSBC actually raised their forecast for the pound (GBP) from 1.60 to 1.75 by year end 2010 and justified the call by saying that the likelihood of an interruption in the asset buying program from the BOE could be as soon as next month. They also feel rates will rise before the Fed but this is a long way off and a lot can happen. Just like the US, I don’t see enough at this point to be comfortable buying this currency, but hey, we’ve been early on some calls too.

The Daily Reckoning