No impulse, no demand

After relatively weak used home sales (released on Tuesday) it was obvious that new home sales couldn’t have been upbeat. It’s because tax credits (for home purchases) expired at the end of April and while some sales from the secondary market could have spilled into the May’s figure it wasn’t about to be the case for the new home sales. And indeed it wasn’t, the figure was a nightmare. The new home sales crushed from 446k in April (revised downwards) to a shocking 300k, way below the market consensus of 420k. The figure hasn’t been that low since the data is registered (that is since 1963). During the previous recessions it bottomed above 400k in 1974 and at 339k in early 80-ties.

While the housing sector wasn’t expected to be a propeller of the recovery, the data illustrate a worrying issue. Such a huge drop in demand might reaffirm views that the recovery won’t last if the stimulus is withdrawn.

The stock markets reacted negatively to the data and that reflects some change in the attitude (as they broadly neglected all negative news during the last two weeks). The bulls might still try to fight but under these circumstances a return of the bear seems to be just a matter of time. Will that be July the 2^nd? (next payrolls release).  

EURUSD – Fed in no hurry mode, Italy placing bonds

The Fed couldn’t surprise and indeed kept all the books in order yesterday and while the euro recovered a bit since then, one shouldn’t draw any suggestions from that reaction. What is worrying, is that premiums on a debt of many European countries not only remain high but in some cases continue to increase. Markets celebrated successful bond auction in Spain last week but the truth is that Spain and Portugal are forced to accept increased premiums even under relatively benign environment (improved global sentiment). Italy which is about to issue debt today and tomorrow is not under that kind of pressure but the 10y spread of roughly 150 bp doesn’t offer too much comfort either. With the spreads so high now, they may yet serve as another drag on the euro, should the sentiment deteriorate again (and with the latest US data in mind it is very likely to happen).      

Events to watch – claims, orders

Since the June’s payrolls may be a make or break for the global sentiment at the entry of the vacations, initial claims (8.30 ET, 14.30 CET, exp at 464k) are worth noticing. They will be released along the durable orders (exp at -1% m/m but at +1% m/m without transportation goods), another important early indicator.   

Przemysław Kwiecień Chief Economist

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