THE SHORT VIEW By John Authers - 1.7 per cent fall in median house prices
THE SHORT VIEW By John Authers
Copyright The Financial Times Limited 2006
Published: September 26 2006 03:00 | Last updated: September 26 2006 03:00
The average house sold in the US last month for less than it had a year earlier. The 1.7 per cent fall in median house prices was the first fall in a decade and the worst annual fall in housing prices since November 1990, in the wake of Saddam Hussein's invasion of Kuwait.
Tellingly, sentiment around the housing market had become so negative that these numbers were slightly better than traders had expected, as home sales fell by only 0.5 per cent.
The question now is whether the downturn in housing will knock the rest of the US economy into recession. This is what the bond market has been signalling for some time.
All bond traders needed was an indicator that the housing problems had spread elsewhere. Last week, they got it with the release of a gloomy survey of business activity by the Philadelphia Federal Reserve.
This found that business sentiment had turned negative for the first time since 2001, and that manufacturing activity was also slowing. Some of this might have been down to regional factors but the report was enough to trigger a rally in Treasuries, which logged their strongest weekly gain in 17 months.
For the bond market, the data was confirmation that housing is bringing down the rest of the economy, and hence the Fed will not raise rates again this year. The Fed Funds futures market is now pricing in a one in three possibility that the Fed will have to start cutting rates by the end of this year.
Ten-year Treasuries yield about 4.55 per cent, far below the current level of the Fed Funds rate, which is at 5.25 per cent. But none of this alarm has crept into the stock market, where the Dow Jones Industrial Average is testing all-time highs. The benefit of rate cuts has found its way into stock prices but not the corollary, that rate cuts will be made necessary by a recession.
Stocks and bonds are unlikely to be so far out of kilter for long. The falling oil price is probably the best explanation for the discrepancy, as markets take cheer from the likely positive effect on third-quarter earnings. But the falling oil price has its dark side - if it is driven by falling demand for fuel, it is notgood for equities.
Copyright The Financial Times Limited 2006
Published: September 26 2006 03:00 | Last updated: September 26 2006 03:00
The average house sold in the US last month for less than it had a year earlier. The 1.7 per cent fall in median house prices was the first fall in a decade and the worst annual fall in housing prices since November 1990, in the wake of Saddam Hussein's invasion of Kuwait.
Tellingly, sentiment around the housing market had become so negative that these numbers were slightly better than traders had expected, as home sales fell by only 0.5 per cent.
The question now is whether the downturn in housing will knock the rest of the US economy into recession. This is what the bond market has been signalling for some time.
All bond traders needed was an indicator that the housing problems had spread elsewhere. Last week, they got it with the release of a gloomy survey of business activity by the Philadelphia Federal Reserve.
This found that business sentiment had turned negative for the first time since 2001, and that manufacturing activity was also slowing. Some of this might have been down to regional factors but the report was enough to trigger a rally in Treasuries, which logged their strongest weekly gain in 17 months.
For the bond market, the data was confirmation that housing is bringing down the rest of the economy, and hence the Fed will not raise rates again this year. The Fed Funds futures market is now pricing in a one in three possibility that the Fed will have to start cutting rates by the end of this year.
Ten-year Treasuries yield about 4.55 per cent, far below the current level of the Fed Funds rate, which is at 5.25 per cent. But none of this alarm has crept into the stock market, where the Dow Jones Industrial Average is testing all-time highs. The benefit of rate cuts has found its way into stock prices but not the corollary, that rate cuts will be made necessary by a recession.
Stocks and bonds are unlikely to be so far out of kilter for long. The falling oil price is probably the best explanation for the discrepancy, as markets take cheer from the likely positive effect on third-quarter earnings. But the falling oil price has its dark side - if it is driven by falling demand for fuel, it is notgood for equities.
posted by Carlos T Mock @ 9:28 AM
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