• Home ::
• Fundamental ::
• Analysis Reports ::
• Daily Global Commentary

Daily Global Commentary

Sales of new single−family homes dropped 3.2% to an annual rate of 1.004 million units

Thu, Nov 30 2006, 02:01 GMT
by Northern Trust Economic Research Department

Northern Trust  |  View company's profile

Vote:

555ea172-6631-4fdd-9bf1-eaf27cead08f

0

0

• Send
• Print
• Add To
• Rss

Downward Trend of New Home Sales Persists

Sales of new single-family homes dropped 3.2% to an annual rate of 1.004 million units. Estimates of new home sales for the period July – September show significant downward revisions. Sales of new single-family homes dropped in the Northeast (-39.0%), Midwest (-5.6%), and South (-1.7%) but rose 3.2% in the West. On a year-to-year basis, sales of single family homes are down 26.7% from a year ago.

The median price of a new single-family home at $248,500 moved 1.9% from a year ago, after a sharp 9.2% drop in September. Anecdotal reports and the large inventory of unsold homes in the market place are indicative of further declines in prices of new homes. There was a 7-month inventory of unsold new homes in the market, up from a 6.7-month mark in September. Also noteworthy is the fact that cancellations of existing contracts are not reflected in the inventory data. In other words, actual inventories may be larger than reported.

Noteworthy Upward Revisions of Q3 GDP

Real gross domestic product of the U.S. economy grew at an annual rate of 2.2% in the third quarter, which represents an upward revision from the earlier estimate of a 1.6% increase. Upward revisions of structures(+16.7% vs. +14.0% in advance estimate), equipment and software (+7.2% vs. +6.4% in advance estimate), inventories ($58 billion vs. $50.7 billion in advance estimate), government outlays, and net exports (-$629.4 billion vs. -$639.9 billion in advance report) more than offset downward revisions of consumer expenditures (+2.9% vs. +3.1% in advance estimate) and residential investment expenditures (-18.0% vs. -17.4% in advance estimate).

After-tax corporate profits adjusted for IVA and CCA increased $51.1 billion to $1166.8 billion in the third quarter, taking the year-to-year increase to 31.5%, after a 17.4% increase in the second quarter. The strong year-to-year gain in corporate profits is partly due to the fact that in the third quarter of 2005 hurricanes reduced corporate profits.

The personal consumption expenditure price index excluding food and energy rose 2.2% in the third quarter, one notch lower than the earlier estimate of a 2.3%.

Real gross domestic product is predicted to have risen at a slower pace than the third quarter gain of 2.2%. Weaker growth of all major components of GDP and a decline in residential investment expenditures are the reasons for a further deceleration in the growth rate of real GDP. Chairman Bernanke’s tough talk about inflation will probably receive less importance in the December 12 FOMC policy statement because additional data pointing to further weakening of the economy will be available. The Fed is predicted to lower the federal funds rate at the March 2007 FOMC meeting.

UK Interest Rate Outlook For 2007 Still Unclear

Since the release last week of the minutes of the November 9 meeting of the Monetary Policy Committee (MPC), the markets have decided that UK interest rates have hit their peak for this cycle. The minutes revealed that two of the nine voting members had argued in favor of a pause. Back on November 15 the Bank of England (BoE) released its latest Quarterly Inflation Report, which forecast that inflation would exceed the 2.0% medium-term target only very slightly if interest rates remained at 5.0%. The Report seemed to conclude that interest rates may have peaked, but did warn that wage deals in the January pay round would have to be watched closely – a point reiterated by Governor Mervyn King in his subsequent news conference.

Our own feeling is that it’s too soon to rule out another rate hike – the MPC’s bias clearly remains toward tightening. But nor is a Q1 2007 increase to 5.25% necessarily in the cards. Uncertainty abounds, and the renewed slide in the dollar and jump in sterling will further muddy the data waters. As King put it earlier this month, “there is significant uncertainty about the outlook for inflation.”

We do know that the MPC has been concerned about the marked revival in the housing sector this year, and has started to pay closer attention to M4 money supply growth rates (see Daily Global Commentary, October 30: UK Housing Market and Money Supply Data Still Buoyant). Today’s consumer credit data from the BoE showed that Britons racked up nearly £10 billion in mortgage debt last month, the highest in just over three years, taking the annual increase up to 11.3% (11.2% in September). Approvals for future purchases also hit a near-three year high of 128,000, up from 127,000 in September and suggesting that the recent revival in house prices could continue into 2007.

Other housing market surveys have also been pretty robust. On Monday, the British Bankers’ Association (BBA) reported that mortgage approvals rose 3.7% on the year in October, well down from the heady 22% level seen back in June, but still a steady increase. Data from Hometrack showed house prices rose an annual 5.3% this month, the fastest rate in two years and up from 4.9% in October. This echoed the findings from the Royal Institution of Chartered Surveyors earlier this month that house prices rose at the quickest pace in over four years during the three months to October. And, last week the BBA reported net mortgage lending rose by £5.5 billion in October, only just below the £5.6 billion average over the last six months, with gross lending at a monthly record for October.

So, is the housing market still buoyant or have consumers been busy locking in deals before the widely-expected rate hike in November? Today’s data from the BoE included the finding that unsecured lending, which includes credit card debt, dropped to the lowest level of annual increase in well over a decade in October, suggesting that consumers are finally feeling some financial distress.

Meanwhile, today’s final data on M4 money supply growth for last month confirmed an annual rate of 14.1%, down a touch from the 16-year high of 14.4% in September, but still a very strong pace of growth.

All told, this month’s data have shed little light on where interest rates are headed in the first half of 2007. Q3 real GDP growth was confirmed at a healthy 0.7% on the quarter and 2.7% on the year, with stronger business investment offsetting weaker household spending. The BoE expects Q4 to be similarly strong and forecasts growth over 3.0% for 2007. Average earnings growth slowed again in the three months to September, coming in at 3.9% versus 4.2% in the three months to August. And, the annual rate of inflation held steady at 2.4% in October.

All we can do is reiterate the usual mantra of “watch the data.” If earnings growth continues to abate, the January pay round is relatively well behaved, and wider consumer demand continues to show signs of coming off the boil, then the repo rate will stay at 5.0% through the first half of 2007. On the other hand, if inflation expectations start to ratchet upward again in the final weeks of this year (perhaps on another oil price spike?), money supply growth remains at heady levels, and consumer confidence re-emerges, look for a 25bp rate hike in February.

Then again, all of these conjectures could be thrown out the window if the pound manages to do something it has avoided for well over a decade, and reaches $2.

Meanwhile, look for the November surveys on consumer confidence from the GfK and distributive trades from the CBI tomorrow; the CIPS manufacturing PMI on December 1; the CIPS services PMI on December 5; industrial output data for October on December 6; and the final MPC meeting of the year on December 7. The meeting will not bring a change in policy, but it will be interesting to see what the minutes say (due for release December 20) about the outlook for policy in 2007.

South Africa: Trifecta of Strong Reports Are Prelude to Rate Hike Next Week

Over the past month, Johannesburg markets have been pricing in one last rate hike before year-end. Now that three key indicators have confirmed that the economy is getting too warm and price pressures are still brewing, it looks all but certain that the South African Reserve Bank (SARB) will raise the benchmark repo rate by 50 basis points, to 9.00%, after the December 6-7 meeting of the Monetary Policy Committee (MPC). We believe that this hike is indeed necessary, but also that it will not be the end of the current tightening cycle that started back in June.

Yesterday’s report on Q3 GDP (including revisions for the past two calendar years) beat consensus estimates on the high side, registering annualized growth of 4.7% and year-over-year growth of 4.5%, while also offering upward revisions for both 2004 and 2005. This year the expansion has been fueled primarily by domestic consumption, which has had the added impact of boosting inflation due to the rising cost of imports. Inflationary economic growth has been a key criterion in the MPC’s past decisions to raise the repo rate, and will likely receive major prominence in the announcement on December 7th.

The strong GDP report gave additional gravity to today’s releases of October CPI and money supply and credit growth data, all of which were also above forecasts. The CPIX figure, the preferred inflation gauge of the SARB, was up 5.0% on the year – down just slightly from the September figure of 5.1% but still well above expectations. This figure is within the Reserve Bank’s 3-6% target range, but the MPC has pointed out that pipeline pressures are still evident and that risks are still to the upside. Imported inflation also plays a prominent role from the combination of rising import volumes and the weak rand – as noted in yesterday’s GDP report.

The weight of the reports from the past two days is enough for us to wager on a 50 basis point rate hike in December, the same as the last three increases, but one last report gives us good reason to expect more hikes down the road. Money supply and credit extension last month both continued growing faster than expectations. M3 expansion, watched closely by the MPC, accelerated to a brisk 23.5% on the year, while private sector credit extension expanded at 27.5% – the highest rate in the history of the series. These indicators suggest that while today’s inflation might fall within the SARB’s comfort range, tomorrow’s inflation is on an upward trajectory. The effects of these money and credit growth figures will be seen in the Q1 2007 CPI reports, and will give further reason for rate hikes to continue into the spring.

Our call for next week is easy enough: the repo rate will be hiked by 50 basis points to 9.00% on December 7th, and will be accompanied by statements about price stability, strong domestic consumption and rising credit and debt levels. Over the next few months, even if money supply decelerates, the next few CPI reports will not show much, if any, weakness, and will give ample reason for further 50 basis point rate hikes after the February and April 2007 meetings.

• Download Full Daily Global Commentary

Published on  Thu, Nov 30 2006, 02:10 GMT

Vote:

555ea172-6631-4fdd-9bf1-eaf27cead08f

0

0

• Send
• Print
• Add To
• Rss