FMX | Connect – www.fmxconnect.com - (Reported 7/8/2010)
Excerpt from MARKET MUSINGS & DATA DECIPHERING
DOUBLE DIP REVISITED
John Lonski, from Moody’s, was on CNBC yesterday morning and when asked about double-dip recession odds he said that in the past few months they have gone up from 10-15% to 20%. Mr. Lonski, along with everyone else, painstakingly made the point that what is important is that the odds are still below 50%. We are not so sure that is the major point. The major point is that, at the margin, double-dip risks are rising and the odds of a V-shaped recovery are fading. So, if you draw the probability curve, even if not a base-case, there is now a fatter tail around the double-dip view than there was one, two or three months ago. I would add that if jobless claims end back up at 500k, those 15-20% odds will rise five-fold.
What is more important is that the U.S. economy is very fragile and more vulnerable to an exogenous shock than has been the case in the past. Take the situation in 1997-98 when we had the Asian crisis, or the 1994-95 period when we had the fallout from the Mexican fiasco. In both cases, the economy managed a “soft landing” and intermittent weakness in the equity market was a great buying opportunity. But in both cases, the Fed had room to cut rates and stimulate the economy, easing no fewer than three times to prevent a soft landing from becoming a hard landing.
It takes time for these shocks to percolate — six months in 1995 and 12 months in 1998 — and we have yet to feel the full brunt of the European debt crisis hit home, in terms of the depressing impact of their aggregate demand on our export growth. Where the offset from government stimulus comes from next will be interesting to see. If it’s not fiscal policy or the Fed, then something tells us that the bond market is going to have to work that much harder.
MORE WORK FOR MR. BOND
The bond market remains the only game in town when it comes to stimulating the U.S. economy. The commensurate slide in mortgage rates has triggered a mini-boom in mortgage refinancing activity, which rose 9.2% in the July 2nd week, on top of a 12.6% surge the week before — up 157% over the past year to boot. This is helping, at least at the margin, put some cash into homeowner’s pocketbooks.
Still, just to show what little effect it is having, refinancing activity in the U.S. is still some 40% lower than it was the last time we had a major rally in the bond market in late 2008 and early 2009. In fact, coming out of the 1990-91 recession and the 2001 recession, the YoY trend in mortgage refinancing was over 1,000%(!), not 157%, just to put this in some perspective. The reason for the anemic growth this time around is because at the historic lows in yields, which we saw a year and half ago, just about everyone who could at the time managed to refinance, so today’s rally does them little good.
Plus, with one in four mortgage debtors “upside down”, they don’t have the ability to refinance. But every penny counts, and the bond market is doing the best it can to get things going.
What is really amazing is how most strategists hate the bond market, and only see inflation and interest rates having to rise. But yet, when asked why it is they are so bullish on equities, the quick and dirty answer is “well, look at how low bond yields are.” Go figure.
If there is a disturbing development, it is the lack of response on the part of potential homebuyers to the downdraft in mortgage rates. Demand remains anemic, and perhaps this reflects an aversion to taking on debt, and an aversion to buying a depreciating asset. Or perhaps it reflects the allure of landlords dropping their apartment rents and thereby upsetting the rent-buy decision balance. Maybe the White House should embark on a strategy of forcing landlords to hike their rents in a quest to revive the homeownership rate — it’s not as if this group doesn’t believe in government intrusion into the economy.
So, for the third week in a row, and despite a 13bp bond-induced decline in mortgage rates, applications for new purchases fell (by 2%) and are down 35% from year-ago levels; and those year-ago levels were already down 12%. So, after plunging 18% in May and then by 15% in June, mortgage apps for new home purchases are already down 3.4% so far in July. Clearly, as far as the Treasury market is concerned, more needs to be done — and since Mr. Bernanke is done cutting rates, it will be up to Mr. Bond to carry the ball, and likely a little further.
CANADIAN HOUSING SECTOR COOLING OFF
It looks like the impact of modestly higher interest rates and CMHC’s incremental moves to tighten up its underwriting guidelines have taken the steam out of the real estate market, and perhaps the dramatic erosion in affordability that followed on the heels of the parabolic surge in prices simply crowded out a slate of potential buyers. In any event, Canadian housing activity is moving into reverse, and according to our calculations, 100% of the recovery, both directly and indirectly, was rooted in the real estate surge and splurge through most of 2009 and into the opening months of 2010.
Resales in Toronto sagged 23% YoY in June and activity in Vancouver slipped 30.2%. Even in Calgary, where there was less evidence of a bubble, sales fell 42% in June from year-ago levels. And, the supply backlog is starting to rise — and you know what that means for pricing. Indeed, the days of double-digit price appreciation in the Toronto area are now behind us with prices showing an average 8% rise YoY last month.
David A. Rosenberg
Chief Economist & Strategist Economic Commentary
drosenberg@gluskinsheff.com
+ 1 416 681 8919
Source: Market Musings & Data Deciphering
http://www.fmxconnect.com/
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