Efficient markets are supposed to assimilate the data into the current price and move on. They ignore stale news and that appears what they did today. This mornings dismal US new home sales, an annualized 276,000 units was a record low, but a poor number was expected. The program of giving new, or fairly new home buyers a tax credit was a good deal for those who availed themselves of this hand out, but this stimulant is now over. The administrators had hoped that this plan might re-inflate housing prices, rescue some marginally underwater home owners, and bail some banks out of bad loans. It seemed like a simple, wonderful plan, but it did not work.
We also had a durable goods report that showed the core rate or orders was - 3.8%, less than the expected +0.6% and +0.2% in the previous month. Total durable goods order was +0.3%, an improvement over the previous month's -0.1% but far less than the expected +2.9%. Monthly durable goods orders, considered a precursor of future business activity, do not present an optimistic picture, but again no market surprise.
There was one mildly optimistic report coming from Germany. The German Ifo Business Climate report, 106.7% was better than the expected 105.8 and 106.2 in the previous period. Earlier in the week it was confirmed that the German second quarter GDP growth was 2.2%, the fastest quarterly growth since the reunification in 1990. The weaker euro provided the German exporters with a strong tail wind during that period, and not likely to be duplicated going forward.
US equities were hammered early in response to the negative data, but did mount a lethargic rally. Late August is vacation time for the Wall Streeters, causing lighter volume and restrained moves, however concern for the safety of sovereign debt seem to be back in the news.
Bloomberg this morning reported:
Morgan Stanley Says Government Defaults Inevitable "Investors will face defaults on government bonds given the burden of aging populations and the difficulty of securing more tax revenue, according to Morgan Stanley.
“Governments will impose a loss on some of their stakeholders,” Arnaud Mares, an executive director at Morgan Stanley in London, wrote in a research report today. “The question is not whether they will renege on their promises, but rather upon which of their promises they will renege, and what form this default will take.” The sovereign-debt crisis is global “and it is not over,” the report said....."
Varied rates on credit default swaps and new sovereign debt issues are the markets way to handicap risk. Overnight the S & P cut the credit rating of Ireland, the credit default rate to insure against default of their debt for five years went up 21 basis points to 331 today. Greece, thanks to the fund Germany and others established to keep them afloat, is still able to borrow, but at a 900 basis premium to German debt. What are the chances they will take this money for as long as they can get it and the default?
Portugal fared a little better in their auction this week, selling €1.3B of 5 and 10 year debt at 4.371, and 5.312 yield, only a little higher than the previous auction.
The US is not immune from these problems. While the Federal Government has the ability to borrow money and enjoys the luxury of having its currency serve as the world's major reserve currency, the states are not so fortunate. California, currently insolvent, is trying to borrow billions from the state teachers retirement fund. Illinois, Chicago, and Cook County Illinois, the US equivalent of Greek's in terms of financial mismanagement, has to finance about half of it's current expenses with long term general obligation bonds. This is an unpublicized financial mess.
The market has been happy to treat each new piece of bear economic news as a reason to buy the dollar and the yen, and tuck away some of the safe but low yielding US paper. Tomorrow we get the first time unemployment numbers which are estimated to be, 488k and on Friday we get more info about the British and the US GDP. It will be important to see how the market reacts to these numbers. We prefer to stand aside now but wonder, what it will take for bearish US economic news to be bearish the USD?
Disclosure: long USD/JPY