Stocks began the session up strong after the release of better-than-expected economic data prior to the open, but reversed course after yesterday’s UK government bond auction failed, meaning they didn’t get enough bids, and the latest U.S. Treasury auction (of 5-year notes) was met by higher yields. (Although concern over a lack of bids for US Treasuries was over-blown as the bid-to-cover ratio for the 5s was strong at 2.02.) That UK bond market action may have increased doubts that fiscal policies will be able revive global growth; although, the concern didn’t last as a sharp rally in the final hour pushed stocks into the black.
That late-session rally has the technicians jazzed this morning – stock-index futures are up strong thus far in pre-market.
Financials led the rally, gaining another 4.6%. All but two major sectors closed higher, the two laggards being utilities and telecoms.
Market Activity for March 25, 2009
Don’t Get Dollar Policy Wrong (although it sure looks like they will)
Getting back to the Treasury auction for a moment. When we say the concern regarding a lack of demand for Treasuries is over-blown, this is not to say that the Fed and Treasury have wiggle room to be careless here. They mustn’t do too much damage to the US dollar or they will eventually find a real shortfall in bids.
And speaking of the greenback, Treasury Secretary Geithner made a very amateur mistake yesterday when commenting on the Chinese argument to basically bring back IMF special drawing rights (SDRs) – essentially an international currency. Geithner stated the administration was open to the idea, which was a huge mistake and you could see it in trading as the Dollar Index plunged in about two minutes time. Thankfully, according to press reports, former Treasury official Roger Altman was there and gave Geithner another shot at clarifying his remarks. He was then able to make the correct remark and the dollar rebounded in quick order, but failed to get back to where it opened.
Geithner is speaking again today; hopefully he gets his statements right, whether he truly believes them or not. The Treasury Secretary is making it pretty clear he’s a globalist, not to be confused with a free-trader who believes in American sovereignty. And when this sovereignty comes to our currency, policymakers better damn-well make sure the greenback remains the global currency reserve because none of us are going to like it if we move to an international currency. Going down this road will drive the dollar lower and result in more international economic authority, which develops into other troubles.
This is one reason the direction of policy is so upsetting. We must keep the greenback the most cherished currency in the world and the only way to accomplish that is via sound monetary policy and low tax rates on capital, period.
Mortgage Applications
The Mortgage Bankers Association reported that their mortgage applications index jumped last week, marking the third-straight week of increase. The overall index rose 32.2% for the week ended March 20, fueled by a 41.5% surge in refinancing activity. Purchases rose 4.2%.
That magic sub-5.00% fixed mortgage rate continues to do the trick, falling to 4.63% last week (you wont’ see this rate right now as fees are added in, but it’s definitely below the 5% level that people were waiting for to refi. The trend in refinancing activity should add marginal support to consumer activity as household debt servicing will decline.
Durable Goods Orders
The Commerce Department reported durable goods order rose 3.4% in February, blowing away estimates that anticipated a 2.5% decline. The increase was driven by strong machinery and electronics orders. A decent pick up in transportation orders also helped.
Excluding transportation, which is an exceptionally volatile aspect of the report and thus this look helps to smooth the data, jumped 3.9% (the expectation was for a decline of 2.0%). This followed a huge downward revision for January, coming in at -5.9% vs. the -2.5% initially estimated.
The best news within the report was a rebound in the non-defense capital goods ex-aircraft segment (a proxy for business-equipment spending) – the segment had shown significant deterioration since September. The figure jumped 6.6% in February, fueled by those strong machinery and computer & electronics orders – up 13.5% and 5.6%, respectively.
We really need this segment to trend higher as this will provide the biggest boost to the manufacturing sector and show business confidence is on the rise. Further, many people are watching the ISM (national factory activity report) for evidence that the economy has bottomed. ISM is one of the most accurate coincident economic indicators and when it begins to rise into the 40s (it’s been stuck in the 30s since October) this will give the market an added boost – equity traders undoubtedly are keeping a close eye on ISM.
This report is good news but we shouldn’t get ahead of ourselves just yet. The January figures were revised down in a big way and this February rebound does not make up for that large decline in the previous month, not to mention the substantial declines of the previous few months. The three-month rates of change remain heavily negative – down 30.1% for the overall number, 33.7% ex-trans and 37.5% on the business-equipment figure (45.2% below the fourth-quarter average at an annual rates).
Nevertheless, you have to start somewhere and this is a nice reversal, now it must trend higher for a couple of months – that’s the signal to look for.
New Home Sales
The Commerce Department also reported new homes sales rose 4.7% in February to 337,000 units at an annual rate from an upwardly revised 322,000 units in January (previously reported at 309,000). This marks the first monthly increase in new home sales since July.
By region, the South saw the biggest sales increase, up 9.7% and sales in the West rose 6.6%. The Midwest and Northeast saw sales decline 9.1% and 3.3%, respectively.
The supply of new homes fell 2.9% in February (this is inventory not adjusted to the sales rate and marks the 22nd straight month of decline) to 330,000. This is the lowest level of new homes available for sale since 2002 and illustrates the market has worked brilliantly (and harshly) in reducing the excesses from the housing bubble.
The inventory-tot-sales ratio inched lower to 12.2 months’ worth from 12.9 months’ in January. The median price of a new home has dropped 18.1% from the year-ago level to $200,900.
As with the durable goods numbers we need to see a build upon this nice improvement over the next couple of months. New home sales are down 42.5% at an annual rate over the past three-months compared to a 41.1% decline over the past 12 months. As a result, it’s tough to make a statistical argument we’ve hit an inflection point, yet this is a heck of a lot better than another month of decline. Cautios optimism would be the operative word.
One wants to believe, at these ultra-low levels, the housing market has bottomed. The Fed’s decision to buy more than $1 trillion in mortgage-backed securities should drive mortgage rates even lower, and while what the Fed is doing disturbs me regarding the longer term, this should give housing a boost in the short term. Still, the contracting labor market will weigh on sales and this will likely curtail the bounce the Fed is attempting to foment.
Have a great day!
Brent Vondera, Senior Analyst
By region, the South saw the biggest sales increase, up 9.7% and sales in the West rose 6.6%. The Midwest and Northeast saw sales decline 9.1% and 3.3%, respectively.
The supply of new homes fell 2.9% in February (this is inventory not adjusted to the sales rate and marks the 22nd straight month of decline) to 330,000. This is the lowest level of new homes available for sale since 2002 and illustrates the market has worked brilliantly (and harshly) in reducing the excesses from the housing bubble.
The inventory-tot-sales ratio inched lower to 12.2 months’ worth from 12.9 months’ in January. The median price of a new home has dropped 18.1% from the year-ago level to $200,900.
As with the durable goods numbers we need to see a build upon this nice improvement over the next couple of months. New home sales are down 42.5% at an annual rate over the past three-months compared to a 41.1% decline over the past 12 months. As a result, it’s tough to make a statistical argument we’ve hit an inflection point, yet this is a heck of a lot better than another month of decline. Cautios optimism would be the operative word.
One wants to believe, at these ultra-low levels, the housing market has bottomed. The Fed’s decision to buy more than $1 trillion in mortgage-backed securities should drive mortgage rates even lower, and while what the Fed is doing disturbs me regarding the longer term, this should give housing a boost in the short term. Still, the contracting labor market will weigh on sales and this will likely curtail the bounce the Fed is attempting to foment.
Have a great day!
Brent Vondera, Senior Analyst
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