Mortgage Applications Rise. Housing Market Still Suffering.

We had a fairly busy day on the desk yesterday as we were a few folks short; Kristin headed off to San Francisco to join Chuck at the Money Show and Ty is out in Seattle playing in an “old guys” soccer tournament. But luckily the currency markets seem to be on a late summer vacation with the dollar trading in a fairly tight range.

There just wasn’t anything driving the markets on Wednesday, with only one piece of data being released in the US and not much going on in late trading over in Europe. The single piece of information here in the US was MBA Mortgage Applications, which saw a dramatic 13% increase last week. It is no surprise that the mortgage applications were higher, as the average interest rate on a 30-year fixed rate mortgage is at the lowest level since the data began to be collected in 1971. These low rates have the phones ringing off the hook at our EverHome mortgage division. But the data released earlier in the week show that these applications are mostly from existing homeowners refinancing their homes; and not new homebuyers. With interest rates at record low levels, homeowners are again looking to lower their mortgage rates, but these low rates don’t seem to be having an impact on housing sales.

This is one of the big problems facing the Fed; rates have been low for so long that anyone who needs a loan and can qualify has probably already taken advantage of the low rates. So keeping rates low probably won’t have the impact that they have had in the past (this is one of the problems facing Japan!). Rates alone aren’t going to push more people into new homes, and I worry our administration is going to start looking for other ways to boost the housing market. One way is to reinstate a giveaway similar to the housing tax credits that recently expired, and a second is to relax the mortgage standards required by the government backed mortgage giants of Freddie and Fannie. Neither are good options, but I get the feeling our administration is starting to feel the pressure of the mid-term elections, and will need to make some big announcement to boost confidence in the recovery.

Today we will get the weekly jobs data along with the Philadelphia Fed index and the index of Leading Indicators. The jobs data is expected to show another 480,000 people filed for unemployment last week, and the continuing claims are expected to have increased to 4.5 million. Last week’s Economist magazine had a graph comparing the number of jobs added after the end of a recovery for several of the past US recessions. The worst jobs/recovery line followed the 2001 recovery, but the current “recovery” is tracking in a similar fashion. The point of the story is that while the American economy has seen some jobless recoveries, we have never had one on top of another. We are definitely in uncharted waters.

The leading indicators are expected to show a small tick up in July after falling in June. The graph of the numbers looks a lot like a see-saw, with the indicators never settling into a trend line. These leading indicators reflect the outlook for the next three to six months, and confirm that the US economy will be stuck in a rut for the rest of the year.

The euro (EUR) has been stuck in a rut also as of late. Chuck spent all of yesterday on his cross country trek to San Francisco, but did send me his thoughts on the euro late last night:

I continue to worry about the Eurozone… Yes, the euro is trading much stronger than it was at the start of June… But to me, there are problems there that the markets, for now at least, believe have been averted. So, in essence we have renewed Eurozone hope… But like I keep telling you… The Eurozone is not out of the woods…

But, like I’ve been saying for months now… The US is heading for a double dip recession, and for now, that is outweighing the problems in the Eurozone. And as long as that remains the “cry of the markets” then the euro is free to move about the country… Or… It’s free to move higher versus the dollar… But for now, the euro seems be stuck in a rut…

Chuck will be speaking at the Money Show today and tomorrow and has also been contacted for some additional interviews while in San Francisco, so I appreciate him taking the time to send me his thoughts. I would encourage any of the Pfennig readers in the San Francisco area to drop by the Money Show, which is being held at the downtown Marriott.

As Chuck indicated, investors have been getting some mixed signals out of the Eurozone lately. The big boys of Europe, Germany and France, continue to do well on the back of exports. The 10% drop in the value of the euro since the beginning of the year has boosted exports for Germany. These higher exports have led the Bundesbank to increase their GDP forecast for Germany to 3% for 2010. This is a big increase from their previous prediction of just 1.9% growth, and could put Europe’s largest economy on pace to outperform the US.

But austerity measures haven’t been fully instituted, and will definitely have a dampening effect on GDP in the coming months. And many are now questioning the commitment of some of the weakest European economies to fully implement the planned cuts. Spain now says it won’t increase taxes to finance the deficit cutting efforts, and increased the amount it will be spending on infrastructure next year. Officials said the extra money will come from lower than expected financing costs as Spain was recently able to roll their debt at better than expected rates. But the risk is that rates move higher again as questions arise about the global recovery.

As Chuck suggests, the Eurozone is far from being out of the woods, but so is the US dollar. Expect some real volatility in the price of the euro every time one of the PIIGS needs to refinance maturing debt. Right now the markets are fairly confident that the PIIGS are out of trouble. This is apparent from the credit default swap prices that are used to hedge against losses on sovereign debt. The cost to hedge against losses on US Treasuries has risen faster than that for bonds issued by Japan, German, and even Spain. This is an indication of just how risky investors feel the US dollar is right now, and is not a good sign for the future of the greenback.

The pound sterling (GBP) had a good day yesterday after a report showed that UK retail sales rose the most in five months during July. Sales rose 1.1%, much higher than economists’ projections of just 0.3%. A separate report showed that the UK budget deficit dropped slightly from a year earlier. UK leaders are looking to narrow their worrisome deficit of 11% of GDP to 2.1% by 2015. They will be detailing the proposed cuts sometime next week, and many feel these austerity measures will kill their nascent recovery. The pound has benefited from the stronger than expected recovery in the UK, and is surprisingly one of the best performing currencies over the past three months.

The number one currency versus the US dollar over the past three months may surprise you. It is the Swiss Franc (CHF), which has benefited from a combination of safe haven buying and the European recovery. The SNB has tried to slow the appreciation of their currency, but just haven’t had deep enough pockets. It takes a whole lot of cash and more than just a single central bank to fight the currency markets. This is why Japan has backed away from intervention; they just can’t find anyone else willing to help them push the value of the yen (JPY) lower.

Speaking of Japan, a story I read early this morning quoted the Japanese Finance Minister as saying he was worried about nations holding down the value of their currencies to shield exporters. Talk about the pot calling the kettle black! Japan has a long history of currency intervention in order to protect their exporters. In past years, the Bank of Japan has been able to enlist the help of other countries to keep the value of the US dollar higher versus the yen. But recently they have been unable to find any help, and continue to be unwilling to try and “go it alone.” So now they are complaining about policy makers in the US and Europe who appear to be allowing their currencies to depreciate in order to increase their competitiveness.

Calls are getting louder out of the Japanese leaders for some type of intervention to keep the yen from further appreciation. I would have to think we would see further discussion out of the BOJ, and eventually some type of action to try and drop the value of the yen. These prices of 85 yen/dollar certainly look attractive for anyone who is looking to lock in gains.

And Chuck shared one more piece of surprising information last night concerning the Asian markets:

Guess what country had the best performing economy in the second quarter…

And no… It wasn’t China at 10.3%… And it wasn’t even that country that closed off all currency trading 10 years ago, Malaysia at 10.1%…

It was Singapore at +18.8%!! In the words of one of my all-time fave actors… Holy Cr..!

This tremendous growth out of Singapore will likely lead to a further appreciation of their currency, as the government uses the value of their currency much the same way other countries use interest rates. Instead of increasing interest rates, Singapore’s central bank prefers to allow their currency to appreciate in order to hold down inflation, and to throttle down growth. This is why I feel these big growth numbers will likely lead to further appreciation of the Singapore dollar.

To recap: Mortgage applications increased by double digits but housing is still a drag, data today will confirm we are still in a jobless recovery, Germany may outpace the US, but the euro is stuck in a rut, pound sterling and the Swiss franc are the best performers over the past quarter, Japan is complaining about the strength of the yen, and growth in Singapore will likely lead to currency gains.

Chris Gaffney
for The Daily Reckoning

The Daily Reckoning