US Housing construction scraping to new lows as starts and building permits set new records. Obama administration trots out more heavy artillery against housing market declines.


  • EuroZone Dec. Construction Output out at -10.1% YoY vs. -4.7% in Nov.
  • Canada Dec. Wholesale Sales fell -3.4% vs. -2.0% expected
  • US Jan. Import Price Index out at -12.5% YoY vs. -11.2% expected
  • US Jan. Housing Starts out at 466k vs. 529k expected and 560k in Dec.
  • US Jan. Building Permits out at 521k vs. 525k expected and 547k in Dec.
  • US Jan. Industrial Production out at -1.8% vs. -1.5% expected and Dec. number revised to -2.4% from -2.0%
  • US Jan. Capacity Utilization out at 72.0% vs. 72.4% expected and 73.3% in Dec.


Events Today:

  • Australia Jan. New Motor Vehicle Sales (0030)
  • Japan BoJ Target Rate Announcement (no time given)
  • Japan Jan. Nationwide Department Store Sales (0530)

Market Comments

The pound was knocked for a sharp loss after it crossed the wires that the S&P was threatening to put their AAA rating on sovereign debt under review due to the costs of the UK bank bailout. The S&P's recent confirmation of the AAA rating was based on the assumption, according to an S&P executive, that the UK would only promise to back toxic assets to the tune of 20 pct. of GDP - which equates to some £280 billion. But now it is clear that the Treasury will back far more than this, hence the threat to review the rating. Any downgrade would have the UK joining Spain and Greece, who have also seen their ratings downgraded this year. Still, after a spike of GBP weakness, the currency actually regained its composure rather quickly. As of this writing, GBPJPY was trading back at new 3-day highs despite the earlier dip on the news.

It was a busy day for news for sterling, as the BOE minutes from the last meeting showed the MPC voting unanimously to ask the government for permission to print money in the form of quantitative easing measures like buying troubled assets outright with money that is printed into existence. The vote to lower interest rates to 1.00% was 8-1, with super-dove Blanchflower wanting to lower rates essentially to zero without delay (if ever there has been a central bank committee member with a high profile ability to say I told you so!, it is Mr. Blanchflower, who was hammering the dovish message home long before the rest of the MPC understood the plot.)

Yesterday was a watershed day for the Japanese Yen. After initially appearing to reject the weakening move as global equities lost ground, the currency weakened again despite the equity market tumbling back below key support into the close of the US session. This strong divergence from past behavior is a big wakeup call that we can't ignore. With USDJPY trading new highs, we appear to have a real breakout unfolding here. It appears that the stronger JPY cycle may have damaged the Japanese economy so badly that JPY longs are taking a second look at the justification for the risk aversion/strong JPY correlation. Watch the 55-day moving average in GBPJPY as well today to see if that falls as well for further confirmation that we may be entering a cycle of more sustained JPY weakness - a cycle that could really go ballistic if equities rally back above the old support, now resistance. Watch out for the BoJ meeting tonight, though we wonder what they can say to surprise the market at this point.

The US housing starts numbers continue to show the home construction industry in swan dive formation, as the Jan. number showed home construction falling to a record low - even compared to numbers sixty years ago when the US population was half of today's. The steeper the fall, we note, the more quickly this will help the housing market find a bottom, as there is still an awful lot of inventory for the market to absorb after too many homes were sold to speculative buyers rather than those seeking a primary residence. A slowing of additional supply is a necessary constraint for now.

CAD headed stronger on M&A rumors, and also likely due to the flip-flop in JPY behavior as AUD is also up on the day against the also strong USD.

As this is going to press, the Obama administration is out announcing an expansion of its plan to buy Fannie Mae and Freddie Mac mortgages - to up to $900 billion and an expansion in its purchases of Fannie Mae and Freddie Mac stocks to the tune of $400 billion. In addition, it will try to help up to 9 million mortgage holders to modify their mortgages in attempt to lower payments and avoid foreclosure. This is administration is engaged in an all out war on falling home prices, and the costs are mind-boggling. It has to eventually mean higher interest rates and a devaluation of the USD - but eventually is a very uncertain word...and for now, it appears that the biggest risk to the USD at the moment would be a strong recovery in asset markets.


As noted above, the divergence of USDJPY with past behavior in terms of its correlation with risk appetite is a big red flag here that could mean further JPY weakness. The break above 92.40 is a big technical one. This is now support and the pair looks to focus now on its 100-day moving average around 94.00 as well as the 2009 high up at 94.60.



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