WISE MONEY

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US housing starts and permits fell unexpectedly in July, as hopes for a boost from falling house prices and government stimulus efforts for first-time buyers proved over-optimistic.

Privately owned housing starts fell 1 per cent to a seasonally adjusted annual rate of 581,000 units. This was well below market expectations for 600,000 units and significantly less than the revised 587,000 unit figure for June, according to figures from the US Commerce Department. Compared to July last year, housing starts dropped 37.7 per cent.

Construction starts for single family homes, the worst hit part of the housing market, rose 1.7 per cent to an annual rate of 490,000 units, the highest since October. But the headline figure was dragged down by a 13.3 per cent fall in starts on multi-family units.

New building permits, which give a sense of future home construction, fell 1.8 percent to 560,000 units in July. Analysts had been expecting 580,000 units. Compared to the same period a year-ago, building permits declined 39.4 per cent. This was despite the $8,000 Federal government tax credit stimulus efforts introduced for first-time buyers.

The inventory of total houses under construction fell to record low 609,000 in July, the department said, while the total number of permits authorised but not yet started also hit a record low at 102,300.

US stocks rose in morning trade as the surprise drop in housing starts was offset by better-than-expected results from retailer Home Depot. The Dow Jones industrial average was up 63.63 points, or 0.70 per cent, at 9,198.97.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

The markets were boosted by further signs that the weakness in the US economy was bottoming out. US new home sales rose 11% in June far outstripping expectation- firming and improvement in the housing sector is vital to underpinning recovery.

The housing sector is a leading indicator to downturn/upturn in any economy and the news yesterday was greeted well by the markets- sustainability is still the key going forward in this sector and we are still not out of the woods but closer than ever.

As is the trend this good news led to further weakness in the USD and stocks experiencing their longest rally since 2003. The dollar index dropped to its lowest level this year and the main beneficiaries were higher yielding commodity based currencies such as the New Zealand and Australian dollar.

Other economic data affirmed that Italian July consumer confidence rose to 107.5, up from 105.4 in June, and better than the median forecast of 105.9. It is the highest read since November 2007. Meanwhile, French industry demand fell in the Q-2, but less sharply than in previous two quarters.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Larry Summers, chair of the National Economic Council, said there were signs that worst may be over but warned that “it is a long road and it is going to take time” after the damage inflicted on the financial system.

“There are downside contingencies that we’ve got to prepare for, issues in the global economy, in commercial real estate. We can’t know with certainty what’s going to happen next, and there certainly are real risks ahead,” he said at the Americas summit in Trinidad.

US house building appears to be stabilising near 500,000 a month, albeit a very low level. The number of new jobless claims has dropped over the last two weeks.

Dominic Wilson, a strategist at Goldman Sachs, said: “There are few clearer signals than this that the market remains highly uncertain about the recovery path and the risks ahead”

Mr Wilson said one year VIX contracts have remained at elevated levels not seen since the Great Depression.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Bob Pannell, head of research at the CML, said negative equity had “resurfaced” as house prices have fallen and that it “will contribute to subdued property turnover”.

However, the CML said the majority of those in negative equity around two thirds face only modest shortfalls of less than 10 per cent, equating to around £6,000 for those first-time buyers with negative equity, and £8,000 for other home-buyers.

The CML’s estimate is less than some economists’ predictions that nearly four million home owners are already suffering from the predicament. And it is still less than the 1.5 million households estimated to have negative equity at the depth of the last housing market slump in 1993.

It said: “Falling house prices have once again raised the prospect of negative equity for borrowers. Although negative equity may reduce a household’s coping strategies should they encounter payment difficulties, it does not of itself affect the ability to keep up mortgage payments or create a risk of repossession.”

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

This means more interest rate cuts and the ever increasing probability of quantitative easing. It seems that the Bank of England will try a plethora of measures to kick start the UK economy and bring inflation back into line.

The immediate impact of this was a sell off in sterling against the majors- sterling was not helped by employment data as the UK jobless figure rose to just under 2 million.

Another hammer blow was the rhetoric by Mervyn King which stated that the UK economy is in deep recession and that GDP will fall by 4% in early 2009.

Elsewhere, Canada posted their first trade deficit in 32 years as exports dipped especially in relation to the US- this is a far cry from the good times as surpluses bulged.

The deficit came in at C$0.46 billion in December and emphasises the seriousness of the economic slowdown globally- this data helped the CAD to drop quickly to 1.2511 from 1.2430 against the USD- Finance minister Jim Flaherty mentioned that the recent strength of the Canadian dollar has not helped.

In other data from Canada- new home prices fell 0.1% which gave an annual increase of 0.4%- the lowest since 1997. In the US the trade deficit shrank by 4% in December as imports and exports fell as global trade shrinks.

A rush back to risk aversion is highly evident in the last 24 hours as the US financial stability plan fell short on detail- the Dollar and the Yen again benefited as equity market slumped and looked uncertain- this is now an ongoing theme between risk appetite and risk aversion.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

This cross is trading in uncharted territory and is struggling to find support with many expecting to see parity before the year is out. However, UK retail sales just out at better than expected levels (0.3% versus -0.6%) should lend support to GBP over today’s session.

UK Unemployment out yesterday would not have helped GBP as the headline figure rose to 1.07m for November; a jump of 75,700 from October. This is the largest rise since 1991 and does little to quell fears of continued redundancies in London in 2009.

Japanese yen has also been in the headlines hitting record highs of 87.15 last night. JPY is currently trading at 87.68 and may well test yesterday’s high again.

Japan’s Central Bank meet tomorrow and there is speculation that they may well cut rates close to zero in an effort to stimulate their economy. Falling global demand has hit Japan’s economy hard as they have such a export focus. Japan’s rate is currently 0.3%.

Economists are also speculating about the ECB cutting deposit rates as soon as today in an effort to stimulate interbank lending. Cutting deposit rates (from current 2% on overnight cash) would make holding cash with the ECB less attractive and hopefully free up capital for consumers and companies and help the interbank market.

Ever since Lehmans collapsed banks have been very cautious about lending to one another. The Euribor (the euro interbank offered rate) set yesterday at 3.16 which is 66 basis points above the ECB rate.

In commodity markets, yesterday Opec agreed to cut production by a record 2.2m barrels per day but the price of crude oil has continued to fall. Oil has fallen by more than $100 from a record of $147 in mid July to current levels of $43.21 (Brent Crude in London). Opec has cut production three times since September and Opec accounts for 40% of the World’s oil production.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

This morning Wise Money was trying to be a bit positive following the rise in house buyer interest shown in yesterday’s RICS survey. Admittedly, the actual number of sales slumped to a new 30-year low but at least the interest in property was on the increase.

This, added to the further sharp declines in inflationary pressures from easier Producer Input Prices (down 3.3% in November alone for a 12-month 7.5% rise) put the skids under Sterling – especially versus the Euro where we established a new all time low. Other than that, yesterday was a bit thin on data so we look to today’s offerings for a bit of stimulus.

We have important statistics from Germany and the EU this morning as well as further housing and trade data from the UK. On top of that, there are several Central Bankers speaking on their various economies and the expectation that Canada will cut their interest rates at their meeting this afternoon.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.