US home prices fell by 2.8% in May,
year on year, which didn’t help sentiment, nor did the June personal
income and spending data, which came in at 0.4% and 0.1% respectively
and confirmed the recent trend of higher savings and lower consumption,
the bedrock of economic growth. July “official” unemployment rose
slightly to 4.6% from June’s 4.5%, whilst the Fed’s favoured measure of
inflation, the PCE deflator, was as forecast in June at 2.3%.American
Home Mortgage Corp saw its share price plunge 90% after lenders cut its
credit limit, whilst Countrywide Financial saw its stock price lower by
14.5% on the week, despite reassurance that it had a $50BN
“highly-reliable short term funding liquidity available”. The Dow fell
by 0.6% and the S&P 500 by 1.8%, whilst the NASDAQ fell by 2%.
.
Turning to Europe, the Bank of England’s MPC and the ECB left interest
rates on hold, at 5.75% and 4% respectively. The US sub-prime
shock-waves reached Germany this week, as IKB announced huge losses in
the US and saw its share price halve in value before a Government
coordinated rescue package, funded by the rest of the banking sector was
put in place. Euro-Zone CPI fell in July to 1.8% and the regions
unemployment level fell to 6.9% in June from May’s 7%. June retail sales
for the zone disappointed, however, falling to 0.4% against an expected
0.8%. The UK FTSE 100 eased by 0.2% as did the German Dax, whilst the
French CAC 40 fell by 0.9%.
Out East, Japanese vehicle sales in July fell by 9.7% year on year but
land prices rose by 8.6% last year, itself 9 times faster than in 2005
and providing some confidence that the 16 year property slump ended in
2005. Indian and Chinese banks were ordered to set aside larger
reserves, with the latter’s Central Bank announcing its intention to set
up a deposit insurance plan to guarantee depositors’ from bankrupt
banks. The Nikkei fell by 1.8%, whilst the Hang Seng eased lower on the
week by 0.1%.
On the currency front, the $US index fell by 1% to 80.2, whilst once
again US Treasury Bonds’ benefited from the “flight to quality,” from
the volatility of late. 5 & 10 year yields fell by 2% and 1.8%
respectively, ending the week at 4.5% and 4.7%.
Within the commodities complex, the $crude oil price fell by 2% over the
week to $75.5 a barrel, whilst the. $Gold price gained 3.7%, ending the
week at $674oz
Next week sees the latest leading economic indicators released for Japan
and the Euro-Zone, whilst the latest Bank of England quarterly inflation
report and June trade balance are due out for the UK. The US releases
the latest consumer credit and unit labour cost data, with the main
event being the two day FOMC meeting, when any change in interest rate
policy will be announced.
.
US Treasury Secretary, Hank Paulson has applied to the US Congress to
raise the Treasury's debt ceiling (currently at $US 8.965 TRILLION) as
he estimates that the Treasury would run out of "borrowing authority" at
the current limit by October 2007 at the latest. With the sub-prime debt
problems now spilling over to “higher qualities of debt”, one has to
wonder if investors’ appetites for debt of any stripe (including those
of Treasury Bonds) will remain in place by October 2007. A higher yield
may entice them?
“No man's credit is as good as his money”
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