Economic Data Take Back Seat to Housing Concerns

MBA (7/14/2008 ) Velz, Orawin
Last week was light on economic data. The depreciation in the dollar continued to help narrow the trade deficit in May.
While consumer sentiment remained nearly unchanged in July at recessionary levels, according to the University of Michigan consumer sentiment index, economic growth for the second quarter appeared to be far from a recessionary pace. It appeared that the trade sector, which added 0.8 percentage points in the first quarter of 2008 economic growth, contributed to growth significantly more in the second quarter.

In addition, last week’s report of chain store sales posted an increase in June of 4.3 percent—the biggest since March 2007—thanks to the fiscal stimulus payments. As a result of continued improving trade deficit and a temporary boost to consumer spending from the tax rebates, economic growth in the second quarter likely came in at a robust annualized pace of 2-3 percent, following 1.0 percent in the fourth quarter of 2007 and 0.6 percent in the third quarter.

The declining dollar is a double-edged sword, however, as it has continued to put upward pressure on import prices, which jumped 2.6 percent in June for the second consecutive month. Rising energy prices were a contributing factor, but import prices excluding natural gas, petroleum and other fuels also increased strongly.

Finally, housing news remained subdued. The National Association of Realtors Pending Home Sales Index dropped 4.7 percent in May, suggesting that existing home sales will see no meaningful increase in the near term. Existing home sales have been in a narrow range of between 4.9 million and 5.1 million units per month (seasonally adjusted annualized rate) for the past 10 months.

Treasury yields steadily declined through Thursday, as the flight to quality from the stock markets to the Treasury market continued for the second week. Stock selloffs were in response to troubles at financial firms including the two government-sponsored enterprises (GSEs)—Fannie Mae and Freddie Mac—and Lehman Brothers Holdings Inc. The yield on the 10-year Treasury note fell to the lowest level in nearly two months on Thursday.

On Friday, stocks dropped further as crude oil prices surged. The Dow Jones industrials slipped below the 11,000 mark mid-day Friday for the first time in two years. Stocks pared their loss in the afternoon on a report by Reuters that Federal Reserve Chairman Ben Bernanke told Freddie Mac CEO Richard Syron that the two GSEs could access the discount window. As funds moved from the Treasury market to the stock markets, Treasury yields jumped. The 10-year yield stayed around 3.94 percent by mid-Friday afternoon, up 13 basis points from Thursday but unchanged from a week ago.