I’m not sure whether any of us went into yesterday’s session expecting anything special. Volumes had been low on Monday and Tuesday was looking even less auspicious, maybe with the exception of UK’s inflation numbers which had been formally forecast at 0.00% but which the Street was prepared to see at -0.10%. The Street got what it wanted and that was that. No need to delve into the minutiae.
What the Street was not prepared for was the US housing numbers for April. Economists had been looking for 1,015,000 Housing Starts, up from the March figure of 926,000. In the event, the reading was way ahead of forecasts at 1,135,000 and the March figure was revised up to 944,000. For the uninitiated, this is an annualised figure and not a standalone. New Permits also leapt ahead of forecasts at 10.1% MoM rather than the expected 2.1%.
After a raft of rather undistinguished data from the US, especially Friday’s Industrial Production and Manufacturing statistics, this number is a sign that there are, after all, stirrings in the undergrowth. Yields were, quite inevitably, pushed higher although equity markets seemed unimpressed. One swallow, so markets tell us, as summer does not make. Nevertheless, we have been struggling to find positives in the US economy and the fear has been for a cyclical downturn. These figures, unless radically revised down in a month’s time, demonstrate that there is still life in the old dog.
Strategists have already pulled their diaries back out of the drawer and are looking at whether they might need to recalibrate their forecasts as to when the Fed will make its first move.
Personally, I am not overly impressed. Before the great property bubble burst – remember that it was the collapse in the housing market that led to the financial crisis and not the other way around – Housing Starts were running north of 2,000,000. The 50-year average is close to but just below 1,450,000 and it might help to note that the absolute peak was not even during that boom period but back in 1972 when Housing Starts got up to nearly 2,500,000. At 1,135,000, the construction sector is still not delivering too much. Sure, the trend is rising but we also have the incredibly hard winter to make up for so in the greater scheme of things, house building is still pretty weak. There is surely still huge room for improvement.
The Fed must surely wish for the opportunity to begin the normalisation of interest rates, something I believe it should have started this time last year. The opportunity was missed by Madame Yellen as she, for perfectly rational reasons, was still bedding down. I wonder whether now it is the right time given the significant chance of a budding cyclical down-turn. The housing stats are now the joker in the pack. As it happens, the next set is due on June 16, the day before the FOMC meeting, and it will be then that yesterday’s figures are either verified as being part of a trend or dismissed as a flash in the pan.
A propos FOMC, today brings the release of the minutes of the last convocation. I can’t see them adding anything to or taking away from our understanding, or lack thereof, of what the Fed intends to do, going forward. We have a pretty clear view of what the individuals think and on what platform they stand. At the end of the day, the chances of the FOMC ever voting against the will of the Chair are next to nothing and Janet Yellen is still sitting firmly on her hands. The only shock which the minutes could deliver would be an indication that she has shifted her own position but nothing in anything she has said or done outside of the confines of the FOMC’s meeting room would appear to point in that direction.
Total return
Meanwhile, here in Europe, the ECB is trying to regain the initiative. There is no question that markets had escaped with the picnic basket and the wine cooler having left nothing behind other than the table cloth. The central bank was clearly not ready for what happened over the past couple of weeks, having previously been seen as having been in control of where yields and spreads were heading.
Technicians are delighted that the down-trend has been broken and that moving averages are back in the black but real money continues to hurt as yields on Bunds are still higher than they were at the beginning of the year and investment portfolios therefore remain in negative territory. With yields as low as they are, coupon income does little to help to lift investments back into positive total return.
“End users”?
Today brings the next round of bank fines for Forex rate fixing. UBS, Citi, JP Morgan, Barclays and RBS will do their next bit towards deducing the US deficit. Some American muppet expert on the radio this morning was moaning that end users will not be compensated and that the rate fixing might have damaged him on his last trip to Europe. Erm?
How many big figures does the “expert” think were added or taken away by the fixers? And who amongst the end users will be asked to hand money back to the banks if they got more than they deserved from the fixes? It’s all still a bit like describing a 1:0 loss at football as a thrashing. Polemic 5, Reason 0. Now that is a thrashing. ’nough said.
