Existing home sales plummet...

Good day… As I wrote yesterday, the housing market continues to be a drag on the US economy. Sales of previous homes fell to the lowest level in almost four years indicating the US economy will continue the slowdown which began last year. The falling home sales combined with high gas prices to push consumer confidence down. As I expected, this negative data sent the dollar into a tailspin with the currencies shooting back up to challenge last week’s highs.

As I mentioned above, existing home sales fell as expected, but the size of the decline was what shocked the markets. Sales slid 8.4 percent in March, almost double the 4.3% decrease which was expected. A separate report showed home-price declines in 20 major cities accelerated in February. As expected, some of the blame for this bad report was put on the weather, but the size of the decline reveals the fundamental weakness that persists in the housing industry. The inventory of unsold homes continues to hover around 7.3 months and prices for existing homes have been lower year-over-year for eight straight months. Bernanke continues to say the downturn in housing won’t have a major impact on the US economy. That is utter nonsense!! The strong housing industry and bubble in housing prices was responsible for keeping the US economy growing over the past few years, so a reversal in this industry will have to have an offsetting negative impact on our economy. As we have emphasized over and over, the US economy will continue to slide toward recession as the housing market shakes out.

Consumers are starting to feel the pinch of higher gasoline prices and falling home prices as consumer confidence declined to the lowest level in eight months in April. The Federal Reserve is counting on an expanding job market to keep consumers spending and the economy growing. But this months report shows consumers are not as confident in the job market as the Fed. The share of consumers who said jobs are plentiful declined, and the proportion who said they plan to buy a house was the lowest in more than two years. Not good news for the boys at the FOMC who are looking for another bail out by the overly optimistic US consumer. What happens if the US consumer is finally forced to reverse their borrow and spend habits?

Good news out of Europe helped the euro rise to near record highs against the US$. German business confidence increased, reinforcing expectations of higher European interest rates. The Munich based Ifo institute said German business confidence in April rose to the second highest since the country’s reunification. The record high of the Euro is $1.3666 which was reached on Dec. 30, 2004. We will need additional negative data out of the US confirming a longer term slowdown for the Euro to break through this record high. I would have to think the Euro will bust through this record level sometime next month and run all the way to $1.40 or better by the end of the summer. This is a classic tale of two economies moving in opposite directions. The US is rapidly slowing which will force the FOMC’s next move to be down, while Europe’s economies continue to gain upward momentum and the ECB is expected to move interest rates up to combat rising inflation.

The UK economy is also expanding and will likely cause the BOE to increase interest rates next month. Gross domestic product rose .7 percent, matching the pace of the previous two quarters according to a report released in London today. Bank of England Governor Mervyn King said yesterday that policy makers are “determined” to bring inflation back to target. A strong economy and surging house prices will likely force the BOE to raise rates again in May. The UK government last week said jobless claims fell to the lowest in more than a year in March and retail sales rose for a second month. All is well in the UK and the pound sterling has been establishing a new base at $2.00 preparing for the next round of appreciation.

The Swedish krona rose to the highest level since Dec. 29, 2004 as the country’s trade surplus widened more than forecast. Sweden’s trade surplus in March reached 14.6 billion kronor, higher than predicted. Also helping the currency was the appointment of Barbro Wickman-Parak, who this month predicted the bank may have to raise rates another 3/4 percent by mid-2008, to the Riksbank’s six-member board. This appointment definitely moves Sweden’s central bank policy making board toward a more hawkish stance. The Riksbank left its benchmark rate unchanged at its last policy meeting and will likely have to raise rates again later this year. The next rate setting meeting is May 4.

As I predicted yesterday, the Bank of Canada kept its main interest rate unchanged for a seventh meeting. The BOC said the risks of inflation veering from its 2 percent target are no longer as balanced because of rising food and gasoline costs, but a slowing US economy and surging Canadian dollar has offset some of these inflationary pressures.

Japan’s trade surplus widened to a record in March, buoyed by a weaker yen and exports to China, which replaced the US as the nation’s largest trading partner. As we have written in the past, demand from Europe and China is beginning to take the place of the US consumer who is starting to tighten their wallets. Predictions of a global slowdown due to a slowing US economy are overblown as a growing middle class in China and India along with a recovering Europe will keep up worldwide demand and growth.

This morning we will see US durable goods orders for March, MBA mortgage applications, and New Home sales for March. The durable goods orders are expected to who an increase from February’s 1.7% rise, and mortgage applications are also expected to be up from last weeks fall of 2.5%. New Home Sales will be the number to watch, as they are expected to show a slight increase from last month. Finally, the Fed’s Beige Book will be released later this afternoon. The market will be looking through this data to try and determine the direction of the FOMC’s next interest rate move. Should be an interesting trading day so I have got to get to it.

Currencies today: A$.8329, kiwi .7457, C$ .8912, euro 1.3656, sterling 2.0047, Swiss .8322, ISK 64.07, rand 7.0262, krone 5.9369, SEK 6.7239, forint 180.43, zloty 2.7744, koruna 20.59, yen 118.58, baht 32.35, sing 1.5112, HKD 7.8175, INR 40.90, China 7.7161, pesos 10.976, dollar index 81.40, Silver $13.81, and Gold $686.37

That’s it for today… Thunder storms are expected most of the day here, welcome to Springtime in St. Louis! The currencies sure turned on a dime yesterday, and bad home sales could continue the dollars slide today. Hope everyone has a great Wednesday!!

Chuck Butler — April 25, 2007

The Daily Reckoning