We have been warning for many months now of the ‚Second Great Property
Bubble‘ of this century in the USA.

 

New Home Sales, after having never fully recovered from the GFC, are
again collapsing at a frenetic pace.

 

No one wants to talk about it on Wall Street? Similarly in the broader
economic community. Yet, it is very clear in the data, and has been for some
time.

 

We are all aware of sky-rocketing home prices and the joy that brings in
wealth creation for families.

 

Though, just the family home, is merely a peg in a moving wall. In other
words, simply maintaining the ability to move sideways at the same relative
value.

It is investors who have clearly benefited. In particular, the property
fanatics of the various industry motivation groups. However rising mortgage
rates are a real problem for this often severely over-stretched group.

 

Highly leveraged investing in any asset group, stocks or property,
inevitably leads to exactly the same outcome. Higher volatility and significant
correction. Corrections are OK, but wash-out the extreme speculators
corrections can be particularly savage.

 

The collapse in New Home Sales from a point of extreme upward price
extension, artificially created by a behind the curve Fed that fed the speculation,
can to be honest only end one way. That is a property price collapse.
This is likely to be underway within a few months, if not weeks.

 

The US property market is in an extreme bubble state and it is already
beginning to burst.

 

Add a property price correction to extreme food and energy inflation and
rising interest rates, and the answer to this riddle is without equivocation, a
fully-fledged Recession.

 

The USA experience is exactly identical to the current formation of
forces in the Australian economy.

Like the USA, Australian policy makers appear completely unprepared for
what is coming.

This article was written by Clifford
Bennett, ACY Securities Chief Economist. The view expressed within this document
are solely that of Clifford Bennett’s and do not represent the views of ACY
Securities.

 

All commentary is on the record and may be quoted without further
permission required from ACY Securities or Clifford Bennett.

 

This content may have been written by a third party. ACY makes no
representation or warranty and assumes no liability as to the accuracy or
completeness of the information provided, nor any loss arising from any
investment based on a recommendation, forecast or other information supplied by
any third-party. This content is information only, and does not constitute
financial, investment or other advice on which you can rely.

Prior -11.0%Market index 315.5 vs 319.4 priorPurchase index 225.5 vs 225.0 priorRefinancing index 794.9 vs 826.9 prior30-year mortgage rate 5.46% vs 5.49% priorMortgage activity continues to slump, with the drag on refinancing contributing to the decline in the past week. Overall, this continues to suggest that there is a toll being exerted on the housing market even if prices are still yet to really cool down significantly.

ECB is focused on rates for now

The headline is in line with what Lane is also out saying now, that he does not expect a discussion about balance sheet reduction this year. It also ties to the narrative put out by Panetta earlier that the „natural way forward“ is for the ECB to hike rates while keeping the stock of assets purchased under the APP and PEPP constant.
For some context, the ECB balance sheet has hit a fresh all-time high (h/t @ Schuldensuehner):

A strict forward guidance no longer makes senseEnding the year with rates in positive territory is extremely importantWell, his view is certainly not what Villeroy depicted out earlier here. And from Lagarde’s demeanour earlier today, the base case remains for the ECB to move more gradually and stick with a 25 bps rate hike in July – at least for now.

Ofgem CEO, Jonathan Brearly, says he will be writing to UK finance minister, Rishi Sunak, today to inform him on the price cap change. Adding that „the price changes are genuinely a once in a generation event not seen since the 1970s“. Just a reminder that the energy price cap was £1,277 in October last year. That’s quite a staggering rise.This just adds to more woes for UK households as the cost-of-living crisis continues to deepen. There will be many that won’t be able to afford this when the change is officially implemented.

Equities are still looking subdued on the session with tech the laggard after the Snap warning earlier, as risk trades are pulling back some of their advance from yesterday. Here’s a look at some of the moves today:S&P 500 futures -1.1%Nasdaq futures -1.7%Dow futures -0.7%Eurostoxx -0.9%Germany DAX -0.9%France CAC 40 -0.9%UK FTSE -0.3%As much as there was some optimism late last week (into the closing stages at least) and early this week, it is best to be reminded about the challenging backdrop that has contributed to the drag in risk trades since April.Yes, we may be overdue a correction. I mean seven straight weeks of declines for US stocks is definitely up there in terms of the selling being rather stretched. But we certainly are getting a reminder today of all the major themes at play in markets.Inflation pressures are still running rampant as evident by European PMI readings today. Recession risks are continuing to grow by the day and that is evident by the extremely poor UK PMI readings today. And central banks are continuing to look towards tightening policy as evident by Lagarde’s commitment in her remarks earlier today as well.Looking elsewhere, bonds are also bid as risk aversion grips markets in general. 10-year Treasury yields are down 4 bps to 2.82%.In FX, the dollar is sitting more mixed with light changes against most major currencies. The euro and yen are gaining slightly with the former benefiting from Lagarde’s comments and the latter from safety flows into bonds. The pound is the laggard as markets pare back BOE rate hike bets following flattish economic activity seen in May from the PMI readings.

Prior -35UK retailers reported average sales for the time of year in May but expect them to dip below seasonal norms again in June. Of note, the survey found that sentiment in the retail sector deteriorated at its quickest pace since November 2020. Meanwhile, investment intentions for the year ahead stand at their weakest level since the early stages of the pandemic in May 2020.That certainly doesn’t fuel much confidence when put together with the poor PMI readings earlier here.

They now expect German inflation to hit 7%, after initially forecasting 3.5% inflation in its February forecast. Well, we’re already there and given how things are progressing, it may be the case that inflation pressures stay higher for longer now – not helped of course by the Russia-Ukraine conflict.The more notable thing is that from the survey of 25,000 companies, DIHK says that nearly 40% plan to pass on the higher costs on to customers with more than every second company in industry and trade stating that it was intending to pass on the cost increases.Well, the situation in the UK is a rough look for what may be the case in Europe later in the year.

A news item is being circulated that there was an unsuccessful internal attempt to assassinate Russian President Putin a few months ago. For what it is worth (there is no market impact), but it was from within Russia according to the report. 

Headlines:ECB’s Lagarde: We are likely to be in a position to exit negative rates by end of Q3Germany May Ifo business climate index 93.0 vs 91.4 expectedIfo economist: There are no signs of a recession for nowSNB total sight deposits w.e. 20 May CHF 754.1 bn vs CHF 753.3 bn priorChina warns US not to underestimate its resolve on TaiwanBiden: US economy has problems but recession is not inevitableGermany says ready to go ahead with Russia oil embargo even without HungaryChina cabinet announces package of targeted support measures to bolster the economyBeijing reportedly mulls relaxing hotel quarantine to one week for international arrivalsMarkets:NZD leads, USD lags on the dayEuropean equities mostly higher, S&P 500 futures up 1.0%US 10-year yields up 4.5 bps to 2.83%Gold up 0.8% to $1,861.54WTI crude up 0.9% to $111.25The market is in a more positive mood to kick start the new week, with risk trades being spurred on after mostly coming under pressure over the past two months.Equities are hoping to post a bit more of a recovery with US futures keeping 1% higher, aiding the mood in Europe with major indices in the region also posting a slight advance on the session.The optimism was also helped a little as US president Biden said that China trade tariffs may be under consideration to be lifted/reduced but there was an exchange of blows regarding Taiwan.The dollar was pressured lower across the board on the better risk appetite with the antipodeans leading the charge notably. AUD/USD is up over 1% on a push above 0.7100 while NZD/USD is up over 1% as well, closing in on 0.6500.The euro got a notable nudge after ECB president Lagarde talked up rate hikes in her blog. She made mention that negative rates could be phased out by the end of Q3 and that saw the euro extend gains against the dollar, with EUR/USD rising from 1.0610 to 1.0680.GBP/USD also benefited from the dollar’s sluggishness, with the pair extending a breakout above 1.2500 to near 1.2600 currently.Elsewhere, precious metals and oil are also having a good day with gold up 0.8% to $1,861 and WTI crude pushing higher by nearly 1% to $111 on the day.