Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
UK Covd-19 FREE Lateral Flow Self Testing Kits How Use for the First Time at Home - 10th Apr 21
NVIDIA Stock ARMED and Dangeorus! - 10th Apr 21
The History of Bitcoin Hard Forks - 10th Apr 21
Gold Mining Stocks: A House Built on Shaky Ground - 9th Apr 21
Stock Market On the Verge of a Pullback - 9th Apr 21
What Is Bitcoin Unlimited? - 9th Apr 21
Most Money Managers Gamble With Your Money - 9th Apr 21
Top 5 Evolving Trends For Mobile Casinos - 9th Apr 21
Top 5 AI Tech Stocks Investing 2021 Analysis - 8th Apr 21
Dow Stock Market Trend Forecast 2021 - Crash or Continuing Bull Run? - 8th Apr 21
Don’t Be Fooled by the Stock Market Rally - 8th Apr 21
Gold and Latin: Twin Pillars of Western Rejuvenation - 8th Apr 21
Stronger US Dollar Reacts To Global Market Concerns – Which ETFs Will Benefit? Part II - 8th Apr 21
You're invited: Spot the Next BIG Move in Oil, Gas, Energy ETFs - 8th Apr 21
Ladies and Gentlemen, Mr US Dollar is Back - 8th Apr 21
Stock Market New S&P 500 Highs or Metals Rising? - 8th Apr 21
Microsoft AI Azure Cloud Computing Driving Tech Giant Profits - 7th Apr 21
Amazon Tech Stock PRIMEDAY SALE- 7th Apr 21
The US has Metals Problem - Lithium, Graphite, Copper, Nickel Supplies - 7th Apr 21
Yes, the Fed Will Cover Biden’s $4 Trillion Deficit - 7th Apr 21
S&P 500 Fireworks and Gold Going Stronger - 7th Apr 21
Stock Market Perceived Vs. Actual Risks: The Key To Success - 7th Apr 21
Investing in Google Deep Mind AI 2021 (Alphabet) - 6th Apr 21
Which ETFs Will Benefit As A Stronger US Dollar Reacts To Global Market Concerns - 6th Apr 21
Staying Out of the Red: Financial Tips for Kent Homeowners - 6th Apr 21
Stock Market Pushing Higher - 6th Apr 21
Inflation Fears Rise on Biden’s $3.9 TRILLION in Deficit Spending - 6th Apr 21
Editing and Rendering Videos Whilst Background Crypto Mining Bitcoins with NiceHash, Davinci Resolve - 5th Apr 21
Why the Financial Gurus Are WRONG About Gold - 5th Apr 21
Will Biden’s Infrastructure Plan Rebuild Gold? - 5th Apr 21
Stocks All Time Highs and Gold Double Bottom - 5th Apr 21
All Tech Stocks Revolve Around This Disruptor - 5th Apr 21
Silver $100 Price Ahead - 4th Apr 21
Is Astra Zeneca Vaccine Safe? Risk of Blood Clots and What Side Effects During 8 Days After Jab - 4th Apr 21
Are Premium Bonds A Good Investment in 2021 vs Savings, AI Stocks and Housing Alternatives - 4th Apr 21
Penny Stocks Hit $2 Trillion - The Real Story Behind This "Road to Riches" Scheme - 4th Apr 21
Should Stock Markets Fear Inflation or Deflation? - 4th Apr 21
Dow Stock Market Trend Forecast 2021 - 3rd Apr 21
Gold Price Just Can’t Seem to Breakout - 3rd Apr 21
Stocks, Gold and the Troubling Yields - 3rd Apr 21
What can you buy with cryptocurrencies?- 3rd Apr 21
What a Long and Not so Strange Trip it’s Been for the Gold Mining Stocks - 2nd Apr 21
WD My Book DUO 28tb Unboxing - What Drives Inside the Enclosure, Reds or Blues Review - 2nd Apr 21
Markets, Mayhem and Elliott Waves - 2nd Apr 21
Gold And US Dollar Hegemony - 2nd Apr 21
What Biden’s Big Infrastructure Push Means for Silver Price - 2nd Apr 21
Stock Market Support Near $14,358 On Transportation Index Suggests Rally Will Continue - 2nd Apr 21
Crypto Mine Bitcoin With Your Gaming PC - How Much Profit after 3 Weeks with NiceHash, RTX 3080 GPU - 2nd Apr 21
UK Lockdowns Ending As Europe Continues to Die, Sweet Child O' Mine 2021 Post Pandemic Hope - 2nd Apr 21
A Climbing USDX Means Gold Investors Should Care - 1st Apr 21
How To Spot Market Boom and Bust Cycles - 1st Apr 21
What Could Slay the Stock & Gold Bulls - 1st Apr 21
Precious Metals Mining Stocks Setting Up For A Breakout Rally – Wait For Confirmation - 1st Apr 21
Fed: “We’re Not Going to Take This Punchbowl Away” - 1st Apr 21
Mining Bitcoin On My Desktop PC For 3 Weeks - How Much Crypto Profit Using RTX 3080 on NiceHash - 31st Mar 21
INFLATION - Wage Slaves vs Gold Owners - 31st Mar 21
Why It‘s Reasonable to Be Bullish Stocks and Gold - 31st Mar 21
How To Be Eligible For An E-Transfer Payday Loan? - 31st Mar 21
eXcentral Review – Trade CFDs with a Customer-Centric Broker - 31st Mar 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Housing Remains Bernanke's and Stock Markets Unknown

Economics / US Stock Markets Jun 06, 2007 - 10:13 AM GMT

By: Ashraf_Laidi

Economics

Tuesday's stock market declines in the US were attributed to a prolonged rally in bond yields resulting from stronger than expected services ISM survey and remarks from Fed Chairman Bernanke reiterating that core inflation "remains somewhat elevated" . The services ISM hit a 13-month high of 59.7, accompanied by broad improvements in the employment, new orders and prices components, bond yields surged to 4.99%, their highest since mid August.

The services ISM combined with Mr. Bernanke's remarks and last week's strong manufacturing ISM are reducing the prospects for a 2007 Fed cut on the basis of stabilizing growth and prolonged inflationary risks. This is beginning to upset US equities, rendering the June outlook to be bearish from purely technical terms (see S&P 500 chart below).


Housing Remains Bernanke's Unknown

While most equity strategists agree on an inevitable US correction of about 3-5%, the question remains regarding the durability of such correction and the likelihood of a convincing rebound. The recent recovery in US manufacturing as measured by the ISM and regional PMI surveys is rather evident, but the 19K loss in April manufacturing payrolls underlines the importance of jobs-related figures over questionnaires filled by supply managers.

These managers could be enjoying the best of both worlds, where high prices are sustaining margins but without the need to hire new workers. The state of the services industry appears to be heading on a sustainable recovery. But to what extent is this recovery services by long lasting job growth? Sectors such as leisure/hospitality, education/healthcare and professional/business services have shown solid employment creation between 40-60K positions, but the quality of such jobs leaves a question mark as to their livelihood and earning potential beyond the summer season.

Aside from the 176K net loss in manufacturing jobs over the past 12 months, the 5K net loss in retail jobs following April's 24K decline may also be a reflection of the slowdown in nation's retailers, especially in light of the International Council of Shopping Centers' April report, showing the worst performance for that month. Housing remains a drag. Construction jobs came in flat (0K) after a 21K decline in April. Building permits fell 8.9% in April, reaching their lowest level since June 1997 and marking the tenth decline in the last twelve months. This may not bode well for future construction and could weigh on the prospects for future housing starts.

Interestingly, both the bulls and the bears are using the mixed housing data in their favor when making a case on the market and the economy. Even Mr. Bernanke today stayed on the sideline when he said "the slowdown in residential construction now appears likely to remain a drag on economic growth for somewhat longer than previously expected." The sharp slowdown in Q2 GDP growth is already threatening to drag overall GDP growth below the Fed's 2007 central tendency forecast of 2.5%-3.0%.

How much farther will the housing slowdown carry on beyond the Fed's forecast and weigh on homeowners?

How far will energy prices push up fuel costs on US consumers?

And how far will US equities respond to lingering concerns with slower housing and eroding chances of a 2007 rate cut?

Meanwhile, the 10-month high in 10-year yields poses the threat of pricking the equity bubble and further endangering the already shaky housing foundation. Explanations of rising yields have ranged from bond traders' forward looking-outlook of no rate cut, to foreign central banks' reduced buying of US Treasuries. Regardless of the explanation, the medium-term outlook could remain predominantly negative for the US dollar in. A prolonged sell-off in US equities on the back of deteriorating US data would boost hopes of a Fed easing and hurt the dollar at a time when European, Asian and Canadian central banks pursue restrictive monetary policies. But if US economic data - excluding housing - become increasingly positive, a prolonged rally in bond yields should put a drag on US equities, in which turn a broader sell-off would add equities to housing and gasoline as the third bearish threat to the wealth effect and threaten an already uncertain retail environment .

Mr. Bernanke told us today that the tunnel of the housing slowdown has not proven threatening for the US economy. More importantly, the Chairman also told us he has not yet found the light at the end of this tunnel. As long as Mr. Bernanke and his colleagues continue to search for the light, any further increases in US bond yields may prove punishing for mortgage rates and overall demand, especially at a time when lending standards are already tightened, out of obligation.

Although Wednesday's ECB decision is widely expected to produce a 25-bp rate hike to 4.00%, the impact could be largely positive for EURUGBP. Aside from expectations that that the Bank of England will pause on Thursday, the technical set up for EURGBP indicates upside towards the 0.6795 trend line resistance, which is also the 38% retracement of the 0.6854-0.6756 decline. A breach of this obstacle sees prolonged gains towards the 0.6805, followed by 0.6820. Stops made under the 0.6765 support.

USDJPY remains vulnerable to the lack of follow-through buying in US equities, whether it is inflation hawkishness or housing apprehension by the Fed. A relatively scarce US data calendar this week may give way to the 10-month highs in Japanese bond yields and their implications for the yen. Interim support stands at 121.20, followed by 120.60. Periodic bounces in USDJPY have proven relatively abrupt after testing key support levels, but the ongoing hesitance in equities remains a source of pressure.

 

By Ashraf Laidi
CMC Markets NA

Ashraf Laidi is the Chief FX Analyst at CMC Markets NA. This publication is intended to be used for information purposes only and does not constitute investment advice. CMC Markets (US) LLC is registered as a Futures Commission Merchant with the Commodity Futures Trading Commission and is a member of the National Futures Association.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules