Friday, April 22, 2011
Wells Fargo Weekly Economic Forecast
- The Dow Jones Industrial Average rose to its highest level in three years, as upbeat earnings announcements overshadowed somewhat lackluster economic data released during the week.
- Sales of existing homes rose 3.7 percent in March to a 5.1 million unit pace, but distressed transactions accounted for 40 percent of overall sales.
- With foreclosures and short sales accounting for an increasing share of sales, home prices are expected to continue to decline over the next six to eight months, eventually bringing the peak-to-trough decline in the median price and the S&P/Case-Shiller Home Price Index to around 38 percent.
. New homes typically sell for about 12 percent above existing homes, but that premium is closer to 30 percent today, which has placed a considerable drag on housing construction.
- Housing starts rose 7.2 percent in March to a 549,000 unit pace, but much of the increase likely reflects payback from the pullback in February caused by harsh weather conditions.
. Despite many challenges in the housing market, we expect starts to increase to a 620,000 unit pace in 2011.
- Greek government debt is under intense selling pressure of late, as investors see an increased probability of default over the next five years.
. Greek 10-year government bonds were recently yielding 14.719 percent, approximately 11.46 percentage points above comparable German Bonds, while Greek 2-year notes were yielding 22.2 percent, a full 20.45 percentage points above the German 2-year note.
. According to Bloomberg London 5-year credit default swaps, the cost of insuring Greek sovereign bonds jumped to 1,422 basis points, signaling more than a 68 percent chance of Greek debt defaulting within five years.
- The German Ifo survey measuring business sentiment slipped to 110.4 in April from 111.1 in March, while the future expectations balance fell to 104.7 from 106.5 during the previous month.
- The European Central Bank’s recent decision to raise its benchmark interest rate has caused the euro to strengthen over the past month, putting more competitive price and margin pressures on manufacturing exporters.
- Japan released March’s trade balance report which revealed a 2.2 percent year-over-year contraction in Japanese exports.
. From February, Japan’s exports fell 7.7 percent as the earthquake’s impact surfaced, while imports surged at an 11.9 percent year-over-year pace.