High Yielders Sell Off on Bad US Existing Home Sales Data

Yesterday, after the currencies had sold off in the overnight sessions, they traded throughout the US session in a tight range, with a bias to move higher, but were not able to mount any kind of sustained move against the dollar.

This morning, the overnight sessions have left the euro (EUR) about where it was yesterday morning. The worst performers are the ones that were the best performers on Monday… The high yielders… Aussie (AUD), kiwi (NZD), South Africa (ZAR), Norway (NOK), and even Canada (CAD), not that it’s a high yielder, but since Canada was the first G-7 nation to raise rates, they get some credit…

The high yielders saw selling after the US Existing Home Sales report yesterday was downright awful… UGH!

Well… It looks like I was as wrong as, well… I was wrong yesterday when I said that I thought the Existing Home Sales Data would be goosed up by 1. Government assistance, and 2. Lower Home Prices…

Sales of previously owned homes in the US slipped 2.2% in May from a month earlier despite the influence of a fading government tax credit. Although the tax credit ended April 30 for contract signings on homes, buyers have until June 30 to close. Existing-home sales data are based on closings.

The median price for an existing home was $179,600 in May, up 2.7% from a year earlier.

So… 0 for 2 on that call! Not only were sales down (not up), but home prices were up (not down)! UGH!

Those home prices being up is a surprise to me, and quite frankly I don’t see how that happened… But it has to be viewed as a “blip”, for I see home prices slipping another 10% this year, after all the government assistance has dried up and the foreclosures begin to mount… Yes, the foreclosures… I saw a piece on Bloomberg TV that said 2.4 million people will lose their homes this year… YIKES! That’s just plain awful!

On Monday, the Big News was all about China… Well, two days later, the renminbi (CNY) has given back over 50% of its move upward against the dollar on Monday morning. I’m going to stick to my conspiracy theory that I gave you yesterday regarding China’s announcement, until proven otherwise… So far… I’ve got something going here.

However, having said that… I’ve said for years now that China would do itself a favor when fighting inflation, by having a stronger renminbi. A strong currency goes a long way toward fighting inflation, which I’m sure the Chinese are very well aware of! So… Maybe, just maybe, they were sincere with their statement about flexibility for the renminbi… I guess we’ll have to wait-n-see, eh?

The other day, I saw an interview with economist, Paul Krugman, with whom – as I’ve pointed out several times over the years – I have major differences in opinions… This time Krugman was spouting off about the Eurozone states implementing austerity measures… Telling them they were wrong to do so, and that they should spend, spend, spend…

Then this morning two of my faves, US Treasury Secretary Geithner, and the director of the Economic Council, Lawrence Summers… NOT! Let me make this clear, these two guys are not even close to being faves of mine, except if you count my penchant for pointing out how dumb they sound sometimes… And this will be no exception…

Geithner and Summers are prepared to tell the G-20 nations meeting this week, that they should avoid budget cuts that would hurt economic growth. Geithner said, “We must demonstrate a commitment to reducing long-term deficits, but not at the price of short-term growth. Without growth now, deficits will rise further.”

Hmmm… How many arrows will I need to shoot this statement full of holes? Ahem… Timmy… The masses might follow your lead here, but I’m not falling for this… You can not spend your way out of this… Period! And, just wait until your friends on the Hill allow the Bush Tax Cuts to expire… Oh! You didn’t think about that? I guess your answer would be for us to spend more to make up for those tax cuts? I shake my head in disgust!

OK… I have to go on to something else, here… The air conditioning doesn’t turn on for another hour, and I was already hot under the collar! Yes… Another “benefit” of our building… It’s a good thing I love this space we’re in, and what we’ve done with it!

Just in case you were thinking that with Canada raising rates and leaving the US Fed’s rates behind, that the link to the US was gone, you had better think again, for that awful print of Existing Home Sales, sent the loonie down below 97-cents yesterday.

Today’s data cupboard in the US will yield New Home Sales for May…  And let’s not forget the Fed’s FOMC meeting, today! Not that anything will come of it… I guess all we’re resigned to looking for is if K.C. Fed Head, Hoenig, calls for a rate hike… He has been the “lone dissenter” regarding the time period for leaving rates at historic lows being described as “an extended period”…

In the UK this morning, the Bank of England’s (BOE) last policy meeting minutes were printed, and to the surprise of the markets, there was a member who had voted for a rate hike of 25 BPS… Not to worry, the vote was 7-1… But still, maybe this one member can get one of his buddies to join him, and that buddy gets a buddy, and soon, the vote gets messy… We can only hope!

The UK also released their “emergency budget” this morning… And the reaction has been muted for the most part, with the pound sterling (GBP) gaining a bit versus the dollar, but not much to write home about.

I chuckle when I hear the words “emergency budget” and think of Japan in the ’90s… If you weren’t following Japan’s moves in the ’90s, let me explain… Japan, after “having it all” in the ’80s, went the opposite direction in the ’90s… They spent money, threw money, and dumped money on the economy to get it kick started, and it never worked. They would announce a “budget stimulus package” and “emergency budgets” and again, they never worked… So… When I hear the UK announce an “emergency budget,” I think that maybe the UK, too, like us, is “turning Japanese”…

Norway’s Central Bank, The Norges Bank, is meeting while I write, this morning… But don’t expect anything to come of it, as the Eurozone debt problems have put the rate hikes on the back burner with the Norges Bank. I see this hurting the krone, for many traders, etc. had “looked forward” to see additional rate hikes, thus marking up the krone… If these same traders, etc. get the wrong message today, they could very well begin to mark down the krone and move on to greener pastures…

The Swiss franc (CHF) continues to defy gravity, folks… The franc is trading at an all-time high today versus the euro… This is going to really test the fabric of the Swiss National Bank, (SNB) which mentioned recently that it no longer had to “stem the appreciation of the franc”… I think that the SNB will keep this pair from getting too out of whack, which would mean they would buy euros to narrow the spread between the two… And sell francs, which would weaken the franc… But if they do… Look at it as an opportunity to buy francs cheaper!

Gold is stronger this morning, adding to yesterday afternoon’s rally in the shiny metal… The “dip” only lasted one day…

Then there was this… A reader sent me a note about the falling money supply here in the US and was confused about how the money supply can shrink when the government is printing and spending money all the time. Well… This shrinking money supply thing is concerning, to me… True, I didn’t like it when it was HUGE, but it is shrinking faster than you can sell funnel cakes at a State Fair! But let me get back to the confusion… The money supply is a different animal than the spending and printing… Money supply is the total amount of money available in an economy at a particular point in time. There are several ways to define “money,” but standard measures usually include currency in circulation and demand deposits (depositors’ easily-accessed assets on the books of financial institutions.

Hope that helps!

To recap… There are a couple of central bank meetings today (Fed and Norges Bank), but I don’t expect any changes in either one. The currencies traded in a tight range yesterday after the overnight sell off. The Swiss franc is trading at an all-time high versus the euro, this morning, and gold is back on the rally tracks.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning