ECB Decision is on Focus

While the Federal Reserve is maintaining rates unchanged, the European Central Bank (ECB) has 50/50 chance to rise rates on Thursday. However, it should be a one time shot, since the economic growth is fading. The European currency, in the mean time, could increase to higher levels, if technical levels are overcome.

Inflation's risk increasing in the U.S., but growth closely observed

As expected, the Federal Reserve left rates unchanged at 2.00% last week. The tone of the final speech was more hawkish than the previous one. In fact, inflation is the biggest concern now, but risk of growth is almost as important. Only one Fed's official, Mr. Fisher, was in favour of a rate hike. As a result, economic data will be watched very carefully over the next weeks/months, as the fiscal stimulus package is just beginning to produce some results. How? In May, the U.S. personal consumer spending (PCE) increased 0.8% (0.7% expected) from April's 0.4%. Personal disposable income rose instead 5.7% and savings rate moved up to 5.0%.

Nevertheless, only a clear turnaround of the economic cycle would support a rate hike. So far, the economy has managed to grow, despite staying much below last year highs. The final first-quarter Gross Domestic Product (GDP) estimate, as an example, printed 1.0% from 0.9%. In reality, consumer confidence in the United States is at sixteen years low pressured by higher commodity prices, housing declines and shrinking household wealth. In June, the Conference Board's consumer confidence index fell to 50.4 (57.0 expected) from 58.1. Consumers are more concerned about their future and the state of the economy. Both, the present situation and the expectations indices fell. The first to 64.5 from 74.2 and the second to 41.0 from 47.3. The jobs hard to get index moved at the contrary up to 30.5 from 28.3, while the jobs plentiful fell to 14.1 from 16.1.

Housing deep in red, but worst is over?

In May, existing home sales increased 2.0%, as both single (+1.6%) and multiple homes (+5.5%) rose. Unsold homes declined to 10.8 months of supply and median price moved up 3.7%, although they remain 6.3% below the level of one year ago. During the same month, new home sales slid 2.5% (-2.7% expected) from April's increase of 4.8%. Only the Mid-West showed a rise (+5.1%). Inventories climbed to 10.9 months of supply from 10.7 months, while home prices are 5.7% below the level of one year ago. Housing are still in trouble and they might remain weak for some more time, but the worst could be over, if history would repeats itself. In fact, the next months are critical, since various level of support (cyclical and technical) are converging. Nonetheless, sell offs are still possible, followed by a period of consolidation, before house prices will be moving upward again. Let's see why.

Since 1963, the long term uptrend of house prices had two major drawdown from highs to lows. They both lasted approximately two years. The first, from March 1969 until December 1970. The second, from January 1990 to January 1992. It then took about two years from the lows for prices to touch new highs again. The current decline, which started during the second half of 2006 is approaching the critical two year period. In addition, the total of houses sold in the United States, which reached the historical high at about 130 in 2006, is meeting an important bottom at 25/35. From 1963, excluding the major bull market that began in 1991 and lasted fifteen years, important bottoms occurred about every eight years: 1967, 1975, 1983, 1991, 2000, 2008 (?). Tops were instead registered about every seven years: 1972, 1979, 1986, 1993, 2000, 2006, 2113(?).

Angelo Airaghi
MG Financial Group
http://www.mgforex.com

Angelo Airaghi is a Commodity Trading Advisor, registered with the National Futures Association and the Commodity Futures Trading Commission. He has been an active professional since 1990 working for major international financial companies. In the past 10 years, Angelo Airaghi has been an analyst and commentator for national and international media.

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