Wall Street had another day out: the bulls sniffed the air and liked the news from IBM of better profits and a $US15 billion share buyback.
Investors were initially worried about the latest bad news from housing and the sharp rise in wholesale inflation, but soon perked up when IBM revealed its news and Moody’s said they would maintain the credit rating of troubled bond insurer, MBIA.
That enabled investors to ignore the two very large gorillas in the back of the room — inflation and the housing crisis which is worsening as home prices fall at an unprecendented rate — and push the Dow up 114.70 points or 0.9 per cent.
US producer prices for January rose 1% on a headline basis to be 7.4% higher than a year ago — the biggest since late 1991 (and that was after a 4.3% rise in consumer price inflation in the same month). Even excluding food and energy, which rose strongly last month, wholesale prices were up a sharp 2.3% in the year to January.
Of course, US investors ignored this news, they still think the Fed will bail them out, but the bond market believes the inflation bogey and 10 year bonds remain around 3.88% and have been higher in the past week.
And for the second week in a row the price of commodities like oil, wheat, sugar, gold, copper, soybeans, cocoa and coffee rose sharply on a single day, as financial investors were again evident.
Oil rose to a new high of $US100.88 a barrel (US petrol prices are around $US3.10 a gallon, up 75 cents in the last year). Wheat hit its highest price ever overnight, ending at $US12.1450 a bushell for soft wheat; bread wheat is around $US20 a bushell; sugar is now at its highest level for well over a year at more than 14 US cents a pound.
US consumer confidence fell to a five year low; the US dollar fell to an all time low against the euro; the New Zealand dollar hit an all time high and our dollar surged back over 93 US cents, which will cause another round of pain for companies like ABC Learning, QBE and a host of other exporters and international businesses.
But US investors are continuing to ignore this background and what is happening in the bond market as those inflation fears grow: as the Fed has cut short-term interest rates this year longer-term bond yields have risen.
That’s adding to the confusion on Wall Street, as is the growing realisation that while short rates have fallen, there’s been little downward movement in market interest rates for mortgages, personal loans and credit, which continues to put pressure on the already weakened housing sector.
The latest S&P Case/Shiller Home Price Index showed the largest annual drop in its 20-year history with a 9.1% fall in 20 key US real estate markets. The fall to November was 7.7%, so there was a significant acceleration in December.
All metro areas are now reporting at least four consecutive monthly declines and the Case/Shiller 10-city index fell even more sharply and finished down 9.8%. The Case/Shiller indexes compare same-home sale prices and is considered to be among the most accurate assessments of US house prices.
And the latest figures show that the scourge of US homeowners, foreclosures, continue to increase and show no sign of slowing. Figures from RealtyTrac show that bank seizures of homes almost doubled in the year to January as more and more owners failed to meet rising payments as their subprime mortgages reset. More than 233,000 properties across the US were in some stage of default last month.
These latest figures undermined the slight sense of joy from Monday’s figures on existing home sales, which fell again last month, but by less than 1%, leading many commentators to wonder if the bottom had been reached.
The answer is no.
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