Optimists say that yesterday’s sharp selloff in the stock market was merely a healthy bout of profit taking. Perhaps, although this morning’s durable goods report for October offers a fresh dose of caution about the economy.
New orders for durable goods fell 8.3% last month from September, according to the Census Bureau. One has to go back to 2000 to see monthly declines of that magnitude. The year-over-year comparison isn’t that encouraging either. October’s new orders rose just 2.3% over the previous 12 months–the slowest annual pace this year.
But the news wasn’t all bad in the latest batch of number updates. The National Association of Realtors reports that existing home sales last month rose from the previous month for the first time February. Yes, even a dead cat has to bounce, as the saying goes. But can this kitty also start walking again? Never say never. Indeed, total existing-home sales – including single-family, townhomes, condominiums and co-ops – rose 0.5% last month over September, NAR’s press release advised.
A rise of any degree comes as a welcome change from the relentless declines in recent months. Before anyone gets too excited, it’s important to note that October’s new home sales were still down a hefty 11.5% from a year earlier. Nonetheless, those who think the worst is past in the real estate correction can point to today’s existing home sales for support. NAR’s chief economist, David Lereah did just that, offering a ray of cautious optimism by opining:
The present level of home sales demonstrates some confidence in the market, but sales are lower than sustainable due to psychological factors. The demographics of our growing population, historically low and declining mortgage interest rates, and healthy job creation mean the wherewithal is there to buy homes in most of the country, but many buyers remain on the sidelines. After a period of price adjustment, we’ll see more confidence in the market and a lift to home sales should be apparent in the first quarter of 2007.
Then again, a stabilizing housing market doesn’t necessarily translate into a booming economy. Risk is still very much in the air at the moment, as suggested by the latest OECD forecast, which calls for a “mild and short-lived weakening” in the world economy in 2007. Adding to the odds of a slowdown for the United States, the OECD noted, is the task of bringing core inflation down to 2.0% from the current 2.8%, which “may require maintaining the current restrictive stance for some time.”
Translated: don’t hold your breath for an interest rate cut at the Fed’s next FOMC meeting next month. Fed funds futures traders certainly aren’t: the January ’07 contract is priced in anticipation of holding Fed funds steady at the current 5.25%.
The outlook may suggest that it’s too close to call for what happens to economic growth or interest rates, but sitting on the fence just won’t do for the bond market. Indeed, the fixed-income set continues to exude confidence that slower growth, or worse is coming and that inflation won’t be a problem. A tall order, but one that the bond market is inclined to predict.
Indeed, the yield on the benchmark 10-year Treasury has slipped below it’s previous, intraday low of 4.53% set back on September 25. As we write, the 10 year trades at 4.52%–the lowest in more than a year.
Alas, growth isn’t slow or strong enough to skew the odds heavily in one direction or the next. Diversification across asset classes, as a result, has never looked so good in concept, and felt so vulnerable based on valuation and trailing performance. Cash may still be your only friend if you’re planning on picking up bargains in 2007. But for the bond bulls, there’s no time like the present.