Wednesday, September 19, 2012

Forex, US Housing and FMG

Australian dollar within 5c of all time high reaching 1.065c on Sept 14 and putting pressure on the RBA to cut rates to keep our own industry competitive.
The nation sold 58bn of government bonds to foreigners in the year ended June 30.  With federal government undertaking significant fiscal consolidation, any required policy response is more likely to come from RBA in the form of lower interest rates.

Spanish Yield back above 6%

Gold rose whilst USD rose
The decorrelation is showing the accumulation in gold.

Saw a decent spike here after Japanese stimulus. 

Wealth Effect of US Housing
For the first time since the recession, there s potential for rising U.S. property values to boost consumer spending and give the economy a nudge. Housing s so-called wealth effect has been a drag on household purchases since 2008. A projected 2% gain in home values next year will start to lift consumer spending in the second half of 2013, according to economist at Bank of America. They predict the wealth effect will add 0.1 percentage point to spending per quarter, swinging from a 0.9 percentage point drag at the height of the housing crisis in the first quarter of 2009. The contribution represents a long-awaited turning point at a time when a struggling labor market impedes wage growth and manufacturing provides less support for the three-year expansion. US Home prices in the second quarter increased 2.2% from the previous three months, the best performance since the fourth quarter of 2005, according to S&P/Case-Shiller data. The lowest mortgage rates on record, a smaller inventory of available homes and a drop in distressed property sales have fostered the pickup.
     Rising home values stimulate household spending through a channel economists call the wealth effect, which posits that homeowners lift spending in proportion to anticipated changes in wealth over time. A common rule of thumb is that for every dollar increase in housing wealth, consumers will purchase an average of 4 cents more,. The impact is widespread because of the role homes play in Americans  portfolios. Primary residences accounted for 30% of total family assets in 2010, making housing of greater importance than financial assets for the wealth position of most families,  Federal Reserve researchers wrote in June using the most current data. About 66% of U.S. homes were occupied by their owner -- as opposed to renters -- in the second quarter, Census Bureau data show.
     Another indication of the scope of the price gains: more than 1.3 million homeowners regained equity in their properties in the first six months of this year, according to CoreLogic. About 22.3% of homeowners with a mortgage owed more than their homes were worth at the end of June, down from 23.7% three months earlier.
     From 2007 to 2011, the slide in home values cut real estate wealth by $6.7 trillion, an amount equal to about 43 percent of the overall economy. Wealth may have increased $600 billion in the first half of 2012, , noting the boost to spending may come sooner than the brokers forecast. The reversal will provide meaningful support  to growth, lifting consumer spending by as much as 0.5 percentage point at an annual rate, according to the UBS economists. That could help the world s largest economy expand by 2.1 percent this year and 2.3 percent in 2013, they wrote. Homes are for most people the largest asset that they hold, so if there s a recovery not only would there be an improvement in net worth, but there would also be a potentially even more important psychological impact,  

Analysts yesterday warned that the A$4.3 billion financing deal brokered between Fortescue Metals Group and its bankers was a temporary fix. The news of the agreement helped push the iron ore producer's shares up 17 percent to close at A$3.50, but observers noted that the company was still heavily geared. "They are doing all the right things, but it is still A$11.7 billion in debt which is bigger than their market capitalisation," Alex Passmore, head of research at broker Patersons Securities, said. Page 31.
The Australian Bureau of Resources and Energy Economics yesterday published its latest quarterly analysis, showing that the nation is set to lose A$20 billion in export revenue due to the stark fall in commodity prices. "The price phase of ever increasing commodity prices is gone. It doesn't mean prices are going back to where they were in 2002, we still have high prices relative to where we were a decade ago but the ever increasing prices are behind us," Professor Quentin Grafton, chief economist and executive director said.