Markets seize on positive news but analysts warn recession woes not over
Eric Beauchesne
Sun
A for sale sign sits in front of a home in Cleveland, Ohio, in late January. Analysts say that while the U.S. housing market may be slowly recovering the country is still facing economic troubles.
OTTAWA – A one-month rebound in the U.S. housing market doesn’t a recovery make, analysts warned Monday.
But don’t tell that to investors who sent North American stock markets soaring in the wake of evidence suggesting that the bottom of the U.S. housing market recession may finally be in sight, and that U.S. financial markets may not be in as bad shape as feared.
JP Morgan Chase and Co’s upping its bid for Bear Stearns fivefold to $10 US from $2 US a share, plus an unexpected rebound in U.S. home sales last month more than offset widening acceptance that the U.S. is now in recession. The latest acknowledgement was by Deutsche Bank AG, which said the U.S. economy slipped into a recession in the first three months of the year and will remain in one through the second quarter.
The stock market rally, however, reflected optimism that the U.S. recession may not be as deep or as protracted as feared which also fed into gains in the Canadian dollar, which rose just over one-half cent to 98.24 cents US.
The benchmark TSX index closed up nearly 250 points, led by gains in the banks, while Wall Streets’ blue-chip Dow ended the day up almost 200 points.
“Spurred on by improved affordability, U.S. existing home sales unexpectedly rose for the first time in seven months in February, up 2.9,” noted BMO Capital Markets economist Sal Guatieri.
The rebound was widespread, including both single-detached units and the more volatile condos — and in three of the four major regions — while there was also a reduction in new listings of detached homes, he observed.
“While the reduction in inventories is encouraging, one upside surprise in the housing market data isn’t proof of stabilization,” he added, noting that the level of unsold homes on the market remains at historically high levels, and that the focus will now be on other U.S. housing market reports today and Wednesday.
Still, some analysts said the report at least suggests the bottom of the sinking housing market may be in sight.
“Overall, the mix of available sales, price, starts and construction figures may finally be showing the long-awaited bottoming of sales volume that should allow some price stabilization by next year,” said Mike Englund, economist with online think-tank Action Economics.
“This should reinforce a diminished downdraft in construction activity through the remainder of the year, and smaller associated subtractions from GDP growth following the hefty GDP hit projected for the current quarter.”
However, recession fears continued to weigh on oil and gold prices, both of which lost more ground following last week’s steep retreat.
TD Bank reported that last week its commodity index fell 4.5 per cent, the steepest one-week retreat since last August which was also broad based with prices for all 18 commodities losing ground.
And analysts who haven’t yet declared the U.S. is in recession, agree it’s beginning to look like one.
“The evidence is building that the U.S. is in recession,” said RBC Harbour Group’s John Johnston. “In spite of this the downturn still looks to be a relatively mild one, likely between eight and 10 months long … .”
Rather than spiralling into recession, it appears to be “sliding, maybe even meandering into a contraction,” Johnston said. “Downside risks persist, but … concerted policy actions suggest that major downside risks are extremely limited.”
“Most importantly, central bankers have added lots of liquidity to the system and now the Fed has cut the real Fed funds rate to zero, a level of rates that has always triggered equity market and economic recoveries in the past,” he said. “All of this points to a new bull market in equities getting started by summer.”
© The Vancouver Sun 2008