Matthew Johnson
SCOREBOARD: Housing is all
One day in, and I’m wrong already. I could put it down to many factors, but the bottom line is that I had my priorities out of order – I took my eye off the housing ball. The perfect playbook for the past year would have merely been to keep a weather eye on house prices, and inventory-to-sales ratios. This is my lesson for the week – forget about US GDP and labour market data, the most important release is the CS house price index (tonight). As I said yesterday, given that the architecture of the US mortgage market has collapsed, house prices still have further to fall (at least I got something right…).
The IMF blew the top off what started as a mild equity market rally in NY, when they said that estimates of losses of the order of $US1 trillion were probably about right, and that a bottom for the US housing market was not visible. Treasuries already had a bit of a bid tone, as a result of sour developments in finance, and soft European data (German consumer confidence crashed). The IMF said that "credit quality is worsening across many loan classes", and that "credit risk remains elevated, and markets fragile".
Given what’s happening in the housing market, the Fed governors don’t seem to be in a hurry to lift rates. The Fed's Stern said that rates were in a good place to deal with growth troubles, but that if negative real interest rates were sustained for too long, it would not be compatible with price stability. Mishkin spoke in favour of an inflation target (to anchor expectations), and in something of a concession for him, noted that that target should be headline inflation (but said that policy markers should mostly react to core). Mishkin also commented that he never liked the "measured pace" language of the last Greenspan tightening cycle – perhaps suggesting that he’d be in favour of rapid tightening, when the time comes. There are signs of an emerging consensus on rates policy here – up fast, once they are sure housing has bottomed out.
For now, however, housing has centre stage, and Fed funds futures are rallying as hikes in 2008 are (rightly) priced out of the market. This has facilitated a solid rally in Eurodollars, and assisted a bull steepening bid in USTs. From 1630, US 2s are -8.5bps (2.5887 per cent), US 5s are -9.4bps (3.322 per cent), US 10s are -7.5bps (4.013 per cent), and US 30s are -7.2bps (4.613 per cent). Aussie rates underperformed in the rally, with the 3s making 4 ticks (93.775) and the 10s making 4.5 ticks (93.805).
The Dow dropped 240pts (-2.1 per cent), and NAS dropped 2 per cent, and the S&P was -1.9 per cent; from the 1630 close, the September S&P contract is -1.7 per cent, leading our September SPI contract down 2 per cent in overnight trade. Financials once again led the market lower, which should be no surprise given that the worries are focused on the mortgage/housing market.
So that brings me to today. The Kiwi housing market is no doubt still trend weakening, though given the 40 per cent dip in May, June approvals will probably rise a fraction. There’s no Aussie data, and the Japanese data that’s out (unemployment, retail) probably won’t have global reach.
Overnight, there’s the CS house price data, and consumer confidence in the US, and some credit/mortgage data in the UK. The UK mortgage data, in particular, looks awful, and portends deep falls in house prices, and eventual rate cuts from the BoE.
Matthew Johnson is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.
