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Rising US interest rates crush recovery in housing and banking sector

Posted on 13 July 2013 with 1 comment from readers

The 50 per cent rise in US treasury yields over the past couple of months has been a hammer blow to the US housing recovery sending mortgage applications through the floor. That’s bad news for the mortgage suppliers, the US banks.

But you would hardly think so with the S&P financials up 13 per cent over the same period. Is the stock market reading this one wrong? After all higher interest rates should also dampen the flow of money into stocks, quite apart from hitting bank profits.

Fed policy error

However, this would not be the first time that market sentiment has gotten way out of line with economic reality. Last week Fed chairman Ben Bernanke put in a little vigorous backpedaling to try to push rates back down and that sent US stocks to another record close.

Yet the damage to the recovery is already done with mortgage rates locked higher. What will it take to correct this mess?

Why a stock market correction would do the job nicely. That would boost bonds and lower yields while realigning bank shares with a more realistic view on profits.

Will Wall Street deliver? It’s hard to say with the no-can-lose approach of investors to money printing, the sort of herd like consensus that usually ends in disaster.

But the smart money is moving to the sidelines now and the dumb folk may follow. Recent data on company investment is very worrying as it shows the guys with the cash to spend are not spending it. They clearly have serious doubts about the recovery too.

Recovery over?

Indeed, this looks to be the end of the recent ‘recovery’ phase and not the start of a longer upturn. The headwinds against it now are simply too powerful: from the domestic issue of higher interest rates to the pile up of economic problems overseas that will become domestic issues later.

China is not just slowing down but going into a headlong dive into recession. Europe is already there. The UK recovery is more about a Scot winning Wimbledon than the economy. All the BRICS are in trouble.

Where’s the growth going to come from now? The USA?

Posted on 13 July 2013 Categories: Banking & Finance, Bond Markets, GCC Economics, Global Economics, Investment Gurus, Private Equity, Sovereign Wealth Funds, US Dollar, US Stocks

1 Comment posted by readers:

Comment by Bernard M.A.Doff - 13 July 2013

“Indeed, this looks to be the end of the recent ‘recovery’ phase and not the start of a longer upturn. The headwinds against it now are simply too powerful”

Perhaps so but the “recovery phase” has been running from 2009 and despite the cogent arguments of the Editor, Roubini etc it continues to forge ahead.

Ed Note: True but outside of stock and some house prices where is this recovery? We’ve just traveled through Austria and Italy and over to Vancouver and it’s bad news all round. ‘On the low side of indifferent’ one top hotelier in Vancouver told us last week. Italy was dead. Austria struggling.

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