The Dollar
We don’t know for sure what caused the dollar’s weakness, but one aspect that is probably hurting the dollar is the accelerating growth in China, Japan, and Europe. Looking at future price performance, we must consider the possibility of a dollar rally. The chart below shows the speculative positioning in the dollar. When the positioning gets to the point where everyone is bearish, I get nervous because any news flowing the other way could cause a sharp reversal.
Looking at the catalysts for a dollar rally, I would say strong economic reports especially a GDP report with a 3 handle can help the dollar. Another catalyst for the dollar could be China pulling back on its infrastructure spending. The most obvious catalyst would be a smooth raising of the debt ceiling. Obviously, any positive American catalysts causing the dollar to rise would be good for stocks, while any negative factors for international countries would be bad for stocks. A final possibility would be the ECB not tapering as much as expected. That would be bullish for stocks and bullish for the dollar.
Macroeconomic News
Now let’s look at the economic news from this week. The first report we’ll look at is from the housing market. My stance on housing is some areas are expensive, but we aren’t in a real estate bubble like the 2000s. You can’t just look at a chart of home prices and compare the current market to the early 2000s. That would be like someone looking at the price of the Nasdaq and saying it’s going to crash like in 2001 again. Both of these predictions are being made. They are lazy because if you do your research, you will see technology earnings have improved and the housing market is no longer flooded with buyers who can’t afford the house they are looking to acquire. In the 2000s there were people with jobs making $70,000 per year trying to buy a second home. There were mortgages given without money down or proof of income. Anyone could get a house. This was the American nightmare because buying something you can’t afford will never work out.
First let’s look at mortgage applications. Keep in mind, some of the housing related data has been weak recently such as housing starts. When I say this market isn’t in a bubble, that doesn’t mean I expect it to be strong; it just means no collapse is coming. The mortgage application index was down 0.5% on a seasonally adjusted basis and down 2% without adjustments. The Refinance Index was up 0.3% from last week; the Purchase Index was down 2% seasonally unadjusted from last week, but up 9% year over year. The FHA share of mortgages fell from 10.1% from 10.2%. FHA loans can get you a mortgage with as little as 3.5% down. This helps the housing market as it increases demand. It’s not a great idea for the government to be involved with the housing market as we saw in the 2008 collapse. The interest rates on most types of loans fell a few basis points, supporting the market. The takeaway from this report is we’re seeing moderate weakness consistent with the housing starts data.
Now let’s look at the home price index. Housing prices were up 1.6% sequentially and 6.6% year over year. The most overheated area was Washington state, particularly Seattle. Washington was up 12.4% which was the largest appreciation for a state. Seattle was up 15.7% year over year which was the largest increase for a city. The report shows the appreciation in the 2000s housing bubble which provides further evidence that while Seattle may be a bubble, the overall market isn’t. The quickest quarterly appreciation was 2.62% and the quickest year over year appreciation was 10.59%. Both stats are nearly double the current growth rate.
Interestingly, new home sales had a seasonally adjusted annual run rate of 571,000 which was down 9.4% from June and 8.9% from last year. This might be a one-off data point because year to date sales are up 9.2%. Overall, the market is healthy. There needs to be more building to satisfy demand. That’s a high-quality problem.
The final economic report we’ll review is the IHS Markit Flash U.S. PMI. The August private sector growth reached a 27-month high furthering the narrative that Q3 is shaping up well. The index was 56.0 which was up from 54.6 in July. Services activity was 56.9 which was up from last month’s 54.7; this was a 28-month high. Surprisingly, the Manufacturing PMI hit a 2-month low and the Manufacturing Output hit a 14-month low. The director of IHS Markit said that this report indicates GDP growth will be higher sequentially. That’s a big call because the advanced estimate said Q2 GDP growth was 2.6%. This implies a 3 handle is in the cards for Q3. We’ll get the first Q2 GDP revision on August 30th where we’ll see if the optimistic narrative is still on point.
Conclusion
The dollar is seeing an expanding short interest making me worried about my bear call on the greenback. I still am not ready to pull away as there haven’t been any changes to monetary policy in the past few weeks; there also hasn’t been a slowdown in global growth ex-U.S. The housing market looks to be healthy even with some weak data points on sales and starts. It’s interesting to see Markit claiming the U.S. manufacturing is weak. I would blame this on statistical noise. Sometimes surveys clash with each other for an unknown reason. The industrial production data supports optimism, going against this one-off report.
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