New Home Sales Plunge
What a difference a day makes. It was a very windy day; the kind that makes the whole building shake with each gust of wind. So that only means one thing… The nice springtime weather that we’ve seen recently will be bowing down to a return of winter weather. We saw this kind of action in the market yesterday, as the euro (EUR) – and most of the currencies, for that matter – stepped aside for the dollar as the European debt problems resurfaced again. More on that in a bit, but it was mostly a flight to safety type of day.
The housing data out of the US didn’t exactly give investors feelings of comfort. In fact, sales of new homes in February fell out of bed by dropping 16.9% to a 250K annual pace, which is the slowest on record. At the same time, the median price fell 8.9% year over year to $202,100 from $221,900 in February and marked the lowest level since December 2003.
While the January figure was revised up to 301K, we didn’t even come close to the expected figure of 290K. New home purchases fell to record lows in three of the four regions, with the Northeast and Midwest leading the way by dropping 57% and 28% respectively. I know some of these horrible numbers are attributed to rough winter conditions, but the bleeding will continue as long as foreclosures keep climbing.
New home sales are often seen as a current barometer because the sale gets counted when the contract is signed instead of when the contract closes with a previously owned home, which account for about 90% of the housing market. We’ve already seen housing starts fall to nearly a two-year low in February and construction permits falling to a record low so there wasn’t much optimism to begin with, but this has opened some eyes to the fact that the overall economy still has a long way to go.
The other report from yesterday morning was the always volatile weekly mortgage application figure, which showed a gain of 2.7%. Lower interest rates were a contributing factor but the fact that home prices have been falling like a rock and approaching levels that seem like bargains have some trying to catch the bottom of the market. We need to remember that completing an application is one thing, but actually getting it approved is another.
Right out of the gate this morning, we have a few reports due out, which include February durable goods orders. The aggregate figure is expected to slow down to 1.2% from the revised January figure of 3.2%, however, the report excluding transportation is expected to show improvement from the previous figure of -3.0% up to positive 2%. Keep in mind that durable goods are products that are meant to last at least three years. Again, manufacturing has been one of the select few keeping the economy afloat.
Since it’s Thursday, we also get last week’s initial jobless claims as well as the continuing claims, both of which are expected to show marginal improvement. While the number of those collecting emergency and extended benefits doesn’t print, I think this is a very relevant figure and should be taken into consideration, as there are currently 4.36 million in this category. Employment is the foundation to the economy as a whole, so until we see a sustainable and meaningful improvement in labor, we’re going to continue seeing these soft housing numbers and the calls for continued stimulus measures.
As I mentioned at the top, it was a day for the US dollar relative to most currencies but we didn’t see any pullback in the commodities of gold, silver, or oil. In fact, as I left the office last night, gold was trading around $1,440 and silver was nearing the 30-year highs well above $37, so we also had a flavor of safe haven or flight to quality hitting the markets. It wasn’t an all-out aversion of risk or safe haven type of day as the stock market and a couple of currencies actually gained, but traders were more interested in selling anything Europe.
As I mentioned yesterday morning, the bad news started rolling out of Europe first thing as the minutes of the last Bank of England policy meeting suggested they aren’t as close as many thought to raising interest rates, by saying there was merit in waiting to see how the price of oil impacts the economy. I think the market may have gotten ahead of themselves in both interest rate expectations and driving the currency higher on Tuesday when it ran up to 1.64.
We also saw a government report yesterday morning that lowered 2011 growth expectations down to 1.7% from the last forecast of 2.1% in November. The BOE is in a position where it needs to maintain lower interest rates in order to make financing the debt more accommodating as well as providing stimulus to an economy that can’t stand on its own two feet. Anyway, the fact that policymakers signaled that rates weren’t going higher at this point made the pound (GBP) the worst performing currency on the day.
The other news out of Europe that discouraged investors was due to the fact that Portugal’s parliament rejected a deficit cutting plan along with EU leaders delaying their decision for funding a regional bailout system. After the announcement from Portugal, we saw the euro drop into the 1.40 handle and wasn’t showing any signs of stabilizing as I left the office last night. The news wasn’t released until late in the day, so the markets were pretty thin at that point.
The issue at hand is that yields remain at unsustainable levels and would technically force Portugal into insolvency. The ECB only recently stepped in to buy some debt in an attempt to keep it from going sky high, but this hands off approach is a clear sign to many that Portugal is very close to hitting the rescue fund for a bailout. This situation has been some time in the making so it doesn’t come as a complete surprise, but it still casts a shadow.
The more disappointing development came from speculation that final plans to overhaul the European Financial Stability Facility (EFSF) would be pushed off until June. This scenario was one of the stumbling blocks for the euro that Chuck was talking about a few weeks ago when the euro began to climb. We really need to see the establishment of the European Stability Mechanism, which requires a treaty change and provides much more scope in dealing with crisis situations, before the currency can break out.
There was really one currency yesterday that had any type of legs, and that was the Australian dollar (AUD). It seems traders were reducing bets that the government would cut interest rates next month, so we actually saw the Aussie rise about 0.4% on the day. We have the bi-annual Financial Stability Review coming out, so that should give us a bit more direction and at least some good sound bites to work from.
The New Zealand dollar (NZD) also posted a gain, but this time it was on its own merit. The current account deficit narrowed to 2.3% of GDP and was the lowest figure in 10 years. Much of this had to do with a lot of capital inflow for the earthquake rebuilding efforts and other one-time payments, so taking those out of the equation, the deficit stood at 4.1% of GDP. The good news, however, was that 4th quarter exports were up 20% from the same time last year.
As I came in this morning, the markets have at least stabilized and even reversed the selling we saw late in the afternoon. In fact, the only currencies down at this point are the pound sterling and Swiss franc (CHF) as all of the other currencies are on the positive side. It looks as though the debt problems in Europe are being overshadowed, at least for now, by thoughts of a rate hike from the ECB. The yields on Spanish debt haven’t shot up as of yet after Moody’s downgraded 30 Spanish banks, but I’m sure that won’t be too far behind as it seems like the market tends to focus their efforts and may concentrate on Spain once Portugal falls to the pressure.
To recap… New home sales were an even bigger disappointment than existing home sales as they fell to a record low and sales prices fell to the lowest level since December 2003. We have durable goods orders and the weekly jobs numbers to look at this morning. The BOE released the minutes of their last policy meeting and showed they may keep rates on hold longer than previously thought. The debt problems in Portugal look like they’re at a point where a bailout will be needed and a solid plan or mechanism to deal with crisis situations in Europe might be a couple of months away.