Market Economics | Interest Rate Strategy - BNP PARIBAS ...

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confidence index, as builders reported that prospects for single family sales deteriorated in June. Existing home sales should drop sharply in June following a smaller decline the previous month. In May, existing home sales declined by 2.2% m/m and we expect they will drop by 12% in June as pending home sales plummeted 30% in May (Chart 2). New home sales plunged 32.7% m/m in May, supplying further evidence that prospective homebuyers pulled out of the market en masse after the government homebuyers’ tax credit expired in April. We expect new home sales to remain weak in June at 310k annualised units, rebounding by just 3.3% from the 30-year low (Chart 3). Housing is slipping back into dangerous territory and a further extension of the tax credit could be beneficial. However, the recent failure of a stimulus bill that included aid to states and unemployment benefit extensions to pass the Senate highlights the lack of political will for further deficit spending. The bill signed into law on 2 July only extends the deadline for closing transactions The Homebuyer Assistance and Improvement Act of 2010, signed by President Obama on 2 July, recognises that an estimated 180,000 prospective new homeowners were not able to meet the 30 June closing deadline for the tax credit that expired in April due to red tape involving mortgage lenders and guarantors. The new legislation extends the closing deadline from 30 June to 30 September for eligible homebuyers. The law thus provides any homebuyer who entered into a contract on a home by 30 April but was unable to go to closing within the required 60 days, an additional 90 days to close and qualify for the credit. The legislation is great news for those homebuyers who were unable to close before 30 June. However, it does not extend the deadline for homebuyers to sign a contract for a home. Therefore, while the new law will likely smooth the projected path of declines in existing home sales, it will not help revive the demand for housing. Mortgage applications have plunged recently, suggesting housing demand will remain subdued Mortgage applications to purchase a home declined by 22% m/m in May and another 11.5% in June, to their lowest level since 1996 – suggesting prospective buyers are already pulling back sharply and helping underpin our belief that housing demand will remain sluggish in the summer months (Chart 4). We have revised our forecast for residential investment down to 11.5% q/q AR for Q2 and to negative 5.0% in Q3 We previously estimated more of a boost from the tax credit programme and the pullback to be more Chart 4: Mortgage Applications Plunged in May Source: Reuters EcoWin Pro Chart 5: Broker Commissions to Support Residential Investment in Q2 Source: Reuters EcoWin Pro muted. We had projected residential investment to grow 17.0% q/q AR in Q2 and 5% in Q3. However, recent developments suggest less growth in Q2 and point to a contraction in Q3. In Q2, part of this weakness should have been offset by strength in brokers’ commissions, as total housing sales jumped by 8.5% m/m in April. The latest FOMC minutes made a note that “on net, the upswing in the volume of real estate transactions in recent months was likely to boost the brokers’ commissions component of residential investment in the second quarter”. Indeed, while new home sales plummeted by 32.7% m/m in May, demand for newly built homes currently accounts for a mere 5% of the market, while sales of previously owned homes dominate demand. In this respect, while existing home sales declined by 2.2% m/m to 5.66mn annualised units in May, the weakness was not enough to offset a healthy 8.0% gain in April. Brokers’ commissions on the sale of residential structures currently represent 18.6% of residential investment, and were supportive of overall growth (Chart 5). However, a 30% m/m plunge in the pending home sales index, which leads existing home sales by one to two months, points to less of a contribution from brokers’ commissions in Q2 than we previously estimated. Against this background, Yelena Shulyatyeva 16 July 2010 Market Mover 8 www.GlobalMarkets.bnpparibas.com
we expect residential investment to grow by 11.5% q/q AR and contract by 5.0% in Q3. Subdued outlook The Freddie Mac 30-year fixed mortgage rate hit a new low of 4.57% last week (Chart 6). Fresh lows in mortgage rates should provide some support to housing demand. However, the bigger effect should be on mortgage applications to refinance. We look for only a modest improvement in housing demand through the remainder of the year. Consequently, there is likely to be downward pressure on housing prices. As the FOMC minutes noted: “House prices declined somewhat in recent months, reversing some of the modest increases that occurred in the spring and summer of 2009”. Home prices will likely remain sluggish throughout this year. Chart 6: Mortgage Rates at Historical Bottom Source: Reuters EcoWin Pro Yelena Shulyatyeva 16 July 2010 Market Mover 9 www.GlobalMarkets.bnpparibas.com
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Page 3 and 4: 2-10s receivers attractive in the 1
Page 5 and 6: arrest the slow growth dynamic we s
Page 7: US Housing: A Cold Summer • After
Page 11 and 12: ebounded from -13% y/y to +8%. That
Page 13 and 14: At first glance, this latest develo
Page 15 and 16: But property prices have barely cor
Page 17 and 18: political leaders persuaded the pub
Page 19 and 20: …average fiscal multiplier is 1,
Page 21 and 22: US: 10y Range Trade with a Receiver
Page 23 and 24: give-up because we’re switching f
Page 25 and 26: term structure models mentioned bel
Page 27 and 28: swaps. The overall volume of USD 9.
Page 29 and 30: EUR: Deflation Macro Hedge Via Opti
Page 31 and 32: EUR: SAS Diversification to Enhance
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Page 35 and 36: Table 2: BNP Paribas' Inflation For
Page 37 and 38: Inflation: Sell 30y in the UK & US
Page 39 and 40: GBP: Market Downplays Shift to CPI
Page 41 and 42: averaging introduces sizable upside
Page 43 and 44: Europe ITraxx Credit Indices • Ou
Page 45 and 46: SEN vs. SUB There has been no stron
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Page 49 and 50: Trade Reviews Options, Money Market
Page 51 and 52: should not come as a complete surpr
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Page 55 and 56: Currency Spot Trade Recommendations
Page 57 and 58: Economic Calendar: 16 - 23 July (co
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FX Forecasts* USD Bloc Q3 '10 Q4 '1
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