US Dollar and Equities Recover but Bond Yields Continue to Sell Off : What Does this Mean?

It is earnings season and this appears to be cushioning the fall in both the US dollar and the Dow. Stocks clawed their way back into positive territory in the late US trading session after the market digested the more optimistic Federal Reserve Beige Book report. In contrast to the warnings and dour outlook given by Fed Chairman Ben Bernanke last week, the report from the 12 Fed districts provided a breath of fresh air. According to the report, economic growth continued at a modest pace for most districts. Even though consumer spending for 4 out of the 12 districts was mixed or below expectations, business spending was strong. The same could be said about the real estate market, which was weak on the retail level but more active on a commercial level. At the same time however it leaves the market confused about who to believe since Bernanke’s comments could be a more current assessment of the economic situation and a more valid warning about the troubles ahead. Existing home sales fell 3.8 percent in the month June to the weakest level in over 4 years (this is the lowest since Nov 2002). The markets took the weaker numbers in stride because the previous collapse in the US dollar, bond yields and stocks essentially priced the disappointment in. Also, the average sales price increased for the first time in a year while supply remained unchanged. It is not time to get complacent just because house prices have increased. Although possible, we think that it is highly unlikely that Bernanke will be shifting his tone at the bottom of the housing market. The increasing number of late payments reported by American Express and Countrywide Financial is hardly the behavior of a healthy economy. New home sales are due for release tomorrow along with durable goods. The weak dollar could boost orders for big ticket items but new homes sales on the other hand could suffer the same fate as existing home sales. Even though the stock market licked its wounds and the dollar rallied strongly, bond yields continued to sell-off. Interest rate markets tend to be most accurate indicator of the overall market’s assessment of data. The fact that yields are lower suggests that there may be more bad news to come.