Yesterday saw something of a turnaround in many financial markets. In spite of some further poor economic news in the United States, of which more later, the Dow Jones industrial Average managed to recover from some substantial initial falls to close some 20 points higher at 10060. It would appear that the technical or chart levels I mentioned yesterday are having a short-term impact after what have been quite a few days of declines. Either way even the Nikkei 225 which has been the worst performer recently of the main stock markets managed a 61 point rally to 8906 and European markets are following suit this morning too. Even the situation concerning the Yen has died down a little in the short-term with it retracing its steps to 107.7 against the Euro and 84.73 against the US dollar with fortunately (please see my updates on this subject over the past two days) no sign of exchange-rate intervention from the Bank of Japan. The Commodity Research Bureau spot index fell by 0.17 to 453.54 so not much happened in this area.
Gold returns to its highs, are the Japanese buyers?
One impact of the recent traumas has been that precious metal prices have moved higher again. For example gold is now back to its recent highs at US $1244 which is not a good sign for the future. However here is a thought for you this new high is not true for everyone. If you are Japanese the recent rally in the Yen to a fifteen year high against the dollar, in which gold is priced, makes gold look somewhat cheaper to them. There is more logic in them buying gold than many of those from weaker currencies as the Yen is some 8.8% stronger against the US dollar since the beginning of this year.
The US economy and its housing market
After poor figures on Tuesday about the US housing market many eyes would have turned to the report from the Census Bureau on this subject. In the event new home sales fell in July to 278,000 units which was a 12% decline from June and a 32% fall when compared with 2009. In fact this number was the worst number recorded in a history which goes back to 1963 and looking at it on a chart the upward blip caused by the support operations for the US housing market is starting to look just that a blip in a declining trend. The stock of new homes also rose from 8 months worth in June to 9.1 in July.
As it can be confusing let me explain the difference between Tuesdays and Wednesdays numbers, the former are for existing homes and the latter are for new-builds. However the trends were clear in both and one cannot avoid the view that the US housing market looks like it is heading for some price falls as inventories of unsold homes build up. The impact of the assistance programmes for the housing market such as the US Treasury’s HAMP looks as if it was rather short-term. Indeed as time goes by HAMP looks like more of a programme to help banks spread their foreclosure risk over time rather than a plan to genuinely help the housing market. Unfortunately for it the future into which these foreclosures have been moved no longer looks quite so bright.
Durable goods orders
This is a series which is erratic on a monthly basis but some information is usually better than none and they are a factor in economic growth figures. So a rather anemic growth rate for orders in July of 0.3% does not bode well for growth in the third quarter of 2010 . In another familiar trend durable goods orders were much lower than the expected growth of 3% which shows both economic weakness and also some weakness by the forecasters both of whom are in a poor trend! Just as a reminder that this series is erratic the June figures were revised upwards from -1.2% to -0.1%.
This is now quite a long sequence of poor numbers for the US economy. We get the revised figures for growth in the second quarter of 2010 tomorrow and they are likely to be revised down substantially from the initial estimate of 2.4% annualised growth so minds again will return to the slowdown. Just to add to this there has been a report from the Congressional Budget Office on the impact of the stimulus programmes on the US economy. This is not quite as has been reported elsewhere as its estimate of their effect in the second quarter of this year is of between 1.7% and 4.5%. Even subtracting the lower level is likely when the revised figures come out tomorrow to imply that US growth without the stimulus would have been not only negative but possibly fairly negative. For the year as a whole the CBO estimates that the effects of the various stimulus measures will have an upward effect on growth of between 1.5% and 4.1%.
It is looking increasingly likely that the growth reported in the US economy after the credit crunch can be explained pretty much by the stimulus packages employed by the authorities. This means that there has been little or no recovery in the wider economy and to use an analogy the pilot light has not lit the boiler.Looked at this way the equity market rally looks a little surprising to say the least but markets rarely move in the same direction for long and many moves have temporary retracements in them.
US Treasury Bonds
The initial impact of the poor economic news was for US government bond yields to drop again and the ten-year yield fell below 2.5% before rising back above it as equity markets recovered. There are several themes I wish to point out here firstly unless we are going into something like the 1930s experience these yields are to low and we are in an investment bubble where prices do not reflect reality. Also there was an auction of 5 year bonds or Treasury Notes which took place at a record low yield of 1.374%.
I have pointed out before the way these yields are edging further down the maturity spectrum and here is an example of this. As it gets reflected in private-sector rates perhaps there will be some cheap fixed-rate mortgages around in the US or perhaps I should say even cheaper ones. Savers sadly can only look at this with woe.
UK Mortgage and Annuity rates
Such moves are also being exhibited in the UK gilt or government bond market where ten-year yields are now 2.84%. I do not wish today to return particularly as to how unwise this is when you look at our inflation performance I wish to look at two other themes I have discussed in the past.
1. I have written about how our banks have raised their margins in loan and savings markets. Well now we have a test as these falling government bond rates should be reflected in private-sector rates such as fixed-rate mortgages over time rather than bank profits.
2. I wrote a while back on my views on annuity rates and their current levels. I am afraid I have little solace for this thinking of taking one out if they are vesting a pension as they look likely to decline further and I would remind those considering this that on current life expectancy forecasts an average vester of a pension can expect to live for 20 or 30 years whereas in my opinion current rates are based on expectations for the next 2 or 3 years.So I believe that unless the world economy does re-run the 1930s annuities look to be under-pricing the risks that are likely to be in play over the next 20 or 30 years.Current government bond and other yields reflect a fear of a substantial contraction in the world’s over the next few years but even if this does happen those vesting a pension are committing themselves to interest rates based on this view for a much longer period on average. Say for example we see a pick-up in inflation or in fact it simply hits its official target and then look at how this would impact on current yield levels.Please be clear that this is not investment advice it is simply my opinion.
strong>Greek and Irish government bonds: worries return
Not everybody is benefitting from the improvement in government bond yields. The issues over Ireland’s banking and property sectors which I have detailed over the last couple of days have led to a rising trend in her government bond yields. According to Reuters her ten-year government bond yields closed at 5.67% which means the spread with German bunds is at 3.5%.It is fortunate that the Irish authorities have been very punctual in issuing debt and indeed they claim to have already issued what they need for 2010 as otherwise it would now be cheaper to borrow from the European Financial Stability Fund.
As for Greece we have had a slew of what I call “officially inspired” good news. The European Union and the IMF have praised her efforts publicly and have said that she is “on track”. A week ago the second tranche of the aid package for her of some 9 billion Euros was approved which should keep her going into 2011 although this approval still needs rubber stamping by euro zone finance ministers. Although being praised by European Commissioners such as Oli Rehn is something of a poisoned chalice as his pronouncements during Greece’s crisis have usually been a reverse indicator! I notice that even such official pronouncements talk of revenue disappointments which means in plain English that the slowing of the economy has affected the tax take adversely.
If we move out of the official view it is plain from her recent growth and retail sales figures that Greece’s economy is feeling the strain and this is before the full impact of the austerity measures fully bites. If one adds to it the views from the Greek press that public spending reductions have been increased by delaying payments then sooner or later there will be a deterioration in these numbers too. I notice that the GSEVEE confederation which represents the self-employed and small traders has this week presented a study saying that many of its members feel that they are facing a deepening recession. So it appears more and more that official views are being subject to political spin and that reality is not as good as they would like us to believe.
Perhaps investment markets are cottoning on to the difference because over the past week,when government bond yields have generally fallen, Greek ten-year government bond yields have risen by nearly 1% to 11.6% according to Reuters. When they were at such levels before this was called a crisis,whereas according to the EU we are now “on track”.