|Clearance Sale on US Homes!!|
By Greg Weldon JUL 31, 2006 10:32 AM
No wonder then, that Home Builder's sentiment is putrid...
The National Bank of Slovakia tightened monetary policy last Tuesday by a unanimous 7-0 vote, taking their official short-term interest rate higher by 50 basis points, taking the two-week repo-rate to 4.5%, following hard on the heels of the ‘surprise’ rate hike enacted by the Hungarian Central Bank on Monday (key rate up by 50bp to 6.75%.).
Note the tenor of the commentary offered by National Bank of Slovakia Vice Governor Martin Barto:
“The bank’s board expects that monetary policy tightening will have to continue in the coming months. We cannot rule out further increases in interest rates for the rest of 2006.”
The rate hike is just the last in a series of moves designed to provide support for the depreciating Slovak Koruna (Crown) which has included significant direct foreign exchange intervention. We note the sizable decline in Slovakia’s FX Reserves since the end of June, during which time the NBS has ‘spent’ over $3 billion in support of the SKK, amid a reserve contraction from $16.15 billion to $13.06 billion.
The Slovak CB is not the only global monetary authority that is taking a more aggressive stand against currency depreciation and rising rates of inflation, as we note that the Bank of India hiked their official reverse-repo rate last Tuesday, jacking it by +50 bp to 6.0%.
Moreover, after an average monthly increase in India’s official foreign exchange reserves of more than $3 billion over the last year, thanks to currency intervention growth has ceased and reserves have fallen by (-) $1.5 billion since the middle of May.
And the People’s Bank of China is making more noise related to a more aggressively hawkish monetary stance amid intensified speculation that the CB will not only hike short-term interest rates in the near future, but also, that they will begin to take a more serious approach to manipulating the value of the CNY to the upside, in order to assist in the fight against inflation.
Indeed, the Chinese Yuan is making new post-revaluation highs and is now clearly established ‘above’ the psychologically important 8 Yuan per US Dollar level.
Observe the push to new lows in the USD versus the Chinese Yuan as evidenced in the daily chart on display below.
Against a global backdrop that has, and continues to become increasingly dominated by central bank monetary tightening, our focus is the potential exacerbation of the parallel, intensified erosion taking place in the US Housing arena.
The latest macro-data offered in the US is clear on this point, as demand for homes wanes and the supply of unsold homes soars. Data scalpel in hand, we carve away at the data released by the National Association of Realtors (NAR), and the National Association of Home Builders (NAHB).
Indeed, the number of Existing Homes for Sale measured in months worth of sales reached its highest level since July of 1997, and, more impressively, has risen by more than one million homes over just the last twelve months, a nominal increase of nearly 40%!!!
No wonder then, that Home Builder’s sentiment is putrid:
The NAHB Survey results were a horror show, case closed.
Still, despite the obvious signs of an accelerating push into ‘disinflation,’ if not overt ‘deflation’ in the US housing arena, complacency can still be easily identified, as evidenced by the post-data-release commentary offered by NAHB Chief Economist David Seiders, who said:
“The drop indicates a reasonably orderly cooling down, with home sales expected to fall thirteen percent this year, from the record levels last year.”
Amid a wave of contracts that have been cancelled by would-be buyers, if a 13% sales decline is considered ‘orderly,’ particularly when prices are reeling and supply is soaring, we shudder to think of what would be deemed an ‘unruly’ or ‘disorderly’ decline.
With this in mind we shine the spotlight on the data offered last Tuesday by the Richmond Federal Reserve, which revealed a steep and accelerating decline in the retail service sector. Note the following results as per the Richmond Fed Service Sector Sentiment Survey for July:
The ‘traffic’ of prospective consumers, in both the housing arena, and the retail service sector, is collapsing while inventories in both sectors are soaring as a result.
In line with monetary tightening becoming more intense globally, and specifically in two key output/export locations, India and China, we observe that the dramatic shift in underlying macro-supply-demand fundamentals has not gone unnoticed by the US fixed-income market. Evidence the accelerated trend in the Eurodollar Deposit Rate strip as defined by the Dec '06/Dec '07 spread, exhibited in the daily chart below.
Indeed, the 5% level in US fixed-income ‘land’ has become a critical level, technically, with charts of both the long-end 30-Year T-Bond and the short-end 2-Year T-Note yields revealing that a push below this level would constitute a major breakdown in US yields.
For the 30-Year Bond we note the June 13th yield low of 5.04% as the key pivot, and in the 2-Year Note we highlight the July 17th low of 5.01 as the critical downside technical reversal point.
In line with the breakdown that has already taken place in the deferred Eurodollar Swaps (which, in the case of the Dec '06/Dec '07 spread now implies that the market is looking for the Fed to potentially ease monetary policy during 2007), we are closely monitoring the US 2-Year Note for a potential yield breakdown below 5%.
Observe the 12-month daily chart of the US 2-Year T-Note on display below, as the technical significance of the 5% yield level is obvious. Less obvious but perhaps even more technically ‘telling’ is the surge and upside breakout in the med-term Volatility of the 2-Year Note’s yield, a move that strongly suggests that a trade-able trend violation and reversal is becoming increasingly ‘probable.’
A dual move in the 30-Year Bond yield and the 2-Year Note yield would be a powerful one-two punch, in terms of a trend reversal in US fixed-income yields, a move that appears completely justifiable given the rapid and dramatic erosion taking place in the US Housing market, an erosion that is already ‘spilling-over’ into an equally dramatic slowdown in retail demand for Services, at least as is evidenced in the Richmond Fed Survey.
This is the type of macro-housing scenario that we have been anticipating all year long.
Bottom Line: We are waiting for a breakdown below 5% in the 2-Year Note yield, to initiate fresh long-exposure in the US fixed-income arena.