Global Debt Wobble Prevails
Saturday, May 26, 2012
Japan's credit rating downgrade by Fitch Ratings was a bit hard to digest, and talk of Greece’s eminent exit was met with conflicting accounts all week long. Greece discredited rumors and an official statement read that "the Greek finance ministry categorically denies the reports that it was requested during a Eurogroup telephone conference that eurozone members prepare plans for handling the possible exit of Greece from the eurozone." Then another report stated that “European Parliament President Martin Schulz said Wednesday that member states may be preparing for a Greek exit of the euro.”
The Spanish banking saga continued to grab headlines, with a report about how “the Spanish government is poised to invest up to €19bn in its most troubled lender, Bankia, in a bold attempt to end market skepticism about the health of the country’s banking sector.” Thus, the ultimate resolution of debt destruction continues to be postponed, because nobody is willing to accept the fallout.
U.S. Economics: Sales of existing homes increased 3.4%, and the NAR reported seasonally adjusted annualized sales at a rate of 4.62 million, from a downwardly revised 4.47 million in March. Compared to one year ago, sales rose 10%, the tenth straight month of year-on-year gains. Median prices increased 10.1% to $177,400 due to higher volume in the large home market, not necessarily price stabilization. However, inventories increased 9.5% to 2.54 million, representing 6.6 months of supply.
The Commerce Department reported that sales of new homes increased 3.3% to a seasonally adjusted rate of 343,000 units, and up 9.9% from one year ago. The mixed picture of a rebounding housing sector and lack of job growth is hard to consolidate. A 0.7% rise in the median price of a new home last month to $235,700 is much more subdued than the existing homes report.
In view of the apparent strength in housing, mortgage rates hit record lows again, with the 30-year fixed-rate mortgage average easing down to 3.78% from 3.79%. The rate was 4.60% a year earlier, and although 1% is nothing to sneeze at, the monthly differential is hardly a stimulus. The 15-year fixed-rate mortgage remained this past week at 3.04%, a record low set in the prior week.
Manufacturing activity in the central Atlantic region expanded in May for the sixth consecutive month but experienced a considerable decrease to 4 from 14, according to the Richmond Fed’s latest survey. Shipments held steady and employment grew at a faster rate, while new orders grew at a rate well below April’s pace. Jobless benefits fell by 2,000 last week to 370,000, while previous claims were revised up to 372,000 from 370,000, which is still elevated, especially considering the reduced labor force participation.
Orders for durable goods edged up 0.2% in April, the second rise in three months, and after dropping 3.7% in March. Markit introduced its own U.S. Manufacturing PMI and the first number was 53.9 as compared to the last ISM’s PMI reading of 54.8, or somewhat in line. Revised UoM Consumer Sentiment rose to 79.3, the highest level in over 4 years, with gasoline prices (futures) aiding the shift by dropping 17.5% from $3.42 in early April to $2.82 on Friday.
Global Economics: Japan's April exports grew less than expected, as China and Europe continue to weigh, and the trade balance was negative for the 13th month in a row, not a good sign for an export dependent nation. HSBC’s China PMI showed deterioration in operating conditions with a reading of 48.7 and down from 49.3.
Eurozone PMI dropped further to 45 from 45.9, with France sinking to 44.4, and even Germany finally experiencing the euro disease with it’s PMI dropping to 45. That was the third consecutive month with a German negative reading.
Market Trends: The negative stock trends from last week remain, although some stabilization ensued and an unresolved attempt to reach for the neutral zone fell short on Friday. The technically oversold level only provided a pause thus far, and that condition is no longer true. The dollar’s rise continues unabated, while the euro’s negative trend is well defined and has been in place for over three weeks. The yen turned neutral from positive after the credit downgrade. Oil — WTI and Brent — continues to trade lower with negative trends, and copper stayed below the $3.50 level, keeping its negative trend. Gold held on to its negative trend and is now virtually unchanged for the year, while silver continued to slide south. The 10-Year Treasury rate rose slightly to 1.74%, while U.S. Treasuries continued their positive trends. As a final note, both the Canadian and Australian dollars are below parity with the U.S. dollar, and that is an indication of the core global weakness in the commodity sector.