WE HAVE NOT YET REACHED THE BOTTOM

 
David Morris
CFD MARKET STRATEGIST, GFT

WE’RE getting closer to the end of the summer and there is a growing fear that the rest of the year will see serious ructions in the financial markets. US economic data remains unremittingly bleak, and it is a sign of how technically traded the US stock market has become. Any bounces off support are backed up with the line that the data is so bad that it can’t get any worse from here. Unfortunately, it can, and the current trend in a number of significant data points (such as housing, employment, GDP and leading indicators) is pointing downwards.

In the US, July existing and new home sales were released last week. New home sales were down 12.4 per cent on the month while existing home sales plunged 27 per cent to their lowest level in 15 years. The collapse in the housing data follows the ending of the government’s tax credits back in April this year. Yet a decline in bond yields has helped to drive mortgage rates down to record lows. Last week the average rate for a 30-year fixed rate loan fell to 4.36 per cent, its lowest level since Freddie Mac began keeping records in 1971. Despite this, activity in the residential housing market is sclerotic. Sales have been hit by the slowing economy, high unemployment, negative equity and stricter credit standards. Inventories of unsold new homes are up to 9.1 months, and homebuilders continue to add to the stock. As this is July’s data, the probability is that next month will be worse since the August National Association of Home Builders’ index fell for the third month in a row. So we can’t assume this is the bottom.

This has to be worked through properly. Rather than hosing dollars at the economy to try to prop up asset prices, central banks should allow them to adjust down. Banks should be made to write down (or off) their bad assets and rates should be left to the markets. Government meddling delays house prices falling to levels where activity can rebound. Although it will be painful, a greater volume of transactions will stimulate jobs growth, giving the economy a chance to heal.