Public debt fears overshadow worst-ever US housing data

The poorest figures for new home sales in US history were largely ignored by financial commentators yesterday as the markets focused on global debt problems that threaten a rise in interest rates before the fragile global economic recovery can handle it.

Portugal saw its sovereign rating cut by Fitch. US treasuries were hit by poor demand in an auction of five-year notes. Japan approved a new budget with a record $49 billion in new bond issuance. And a pre-election budget in Britain offered no relief for its huge debts.

US dollar surge

The main beneficiary was the US dollar with the euro down to $1.33. US financial markets also took a breather from their endless rally as risk aversion crept back into the market. The S&P is now valued at 22 times earnings, 32 per cent above its 30 year average, and clearly overvalued for this stage in the economic cycle. Gold fell to $1,085.

Meanwhile, the market largely ignored data showing that US new home sales fell to the lowest level on record in February. Sales of new homes dropped unexpectedly, falling 2.2 per cent during the month to 308,000. That was the lowest sales rate on record and much worse than expected.

US new home sales are down 23 per cent since last October. New home sales are off 13 per cent from February 2009. With sales falling for four months running, the inventory of new homes has increased, reaching a supply of 9.2 months.

Housing crisis

The construction of new homes in the United States is a critical source of demand for commodities used in building houses. Only a surge in demand from China has prevented a meltdown in building material prices and related commodities from steel to aluminum and timber.

The now frosty relationship between China and the US is symbolized by the Google condemnation of Chinese censorship and its self-imposed exit. The call for tariffs on Chinese goods to protect US industry is growing. At the same time China is tightening up on credit and could start buying less US treasuries.

Far from being in a fragile recovery the world is set for a round of further instability in global financial markets. In the initial stages the chief beneficiary will be the US dollar but the problems in the treasuries’ market is a reminder that dollar strength could be transitory.