Experts Talk New Home Sales, Slumping Euro, Gold Prices

Bloomberg BusinessWeek compiles comments from Wall Street economists and strategists on the key economic and market topics of Mar. 24.

Ted Wieseman, Morgan Stanley

New home sales (down 2.2% to a 308,000 annualized rate) were more stable in February, along with existing home sales, after the runup last year ahead of the initially scheduled expiration of the homebuyers' tax credit and subsequent payback. Sales have now dropped 23% the past four months, after rising 22% from January through October. With the tax credit having been extended and expanded, adding to already historically high housing affordability resulting from depressed home prices and near-record low mortgage rates and the labor market improving, sales will likely resume moving higher in the months ahead, moving into the key spring selling season. Mortgage applications for new purchases are up 7% so far in March over February, suggesting that sales are improving this month.

Homebuilders are having trouble competing with prices on distressed sales, however, so upside in sales will likely be led by existing homes, and the recovery in homebuilding will probably continue to be very sluggish.

David Wyss, Beth Ann Bovino, Standard & Poor's

Orders for manufactured durable goods rose 0.5% in February, in line with expectations. January, however, was revised to a 3.9% jump, from the 3.0% reported last month. Shipments, perhaps affected by weather, fell 0.6% in February, after a 0.1% January drop. Civilian aircraft orders fell 32.7% in February, after jumping 134.9% in January. Orders for nondefense capital goods excluding aircraft, the key indicator for future equipment spending, rose 1.1%, after dropping 3.9% in January.

Overall, the report was a bit stronger than expected, but the weak shipments data will cut our estimate of first-quarter gross domestic product slightly.

Vassili Serebriakov, Wells Fargo Bank

The euro is in trouble again, falling to a fresh 10-month low against the dollar after a break below an important technical support level. Markets reacted negatively to newswire reports that the International Monetary Fund is likely to be involved in any Greek aid package. While the details of the IMF's role are still unclear, the fact that the European Union was not able to resolve the issue internally is likely to be seen as a sign of institutional weakness. Meanwhile, a Portugal rating downgrade is also adding to the euro's woes today. As short euro positioning is probably very heavy already, the euro could see a corrective bounce in the coming days. We continue to see such bounces as selling opportunities.

Meanwhile, the U.S. dollar is stronger more broadly today, and the dollar's trade-weighted index has now reached its highest level since May 2009. The fact that currencies took little note of the relatively dovish Fed comments over the past couple of days suggests the market's mindset has probably shifted to a more positive relative outlook for the U.S. economy, a view that we share.

Bart Melek, BMO Capital Markets

The recent gold correction represents a longer-term buying opportunity for the metal and the associated miners—skyrocketing U.S. federal debt is the catalyst. Gold fell to a one-month low of $1,090 per ounce today as a stronger U.S. dollar reduced the impetus to buy the precious metal as a hedge. (Gold typically moves inversely to the U.S. currency.) The greenback rallied to a 10-month high against the euro after the French and Germans said any package to bail out Greece would likely involve help from the IMF. The news of any IMF involvement is undermining confidence in the European Union and has investors questioning the long-term viability of the euro. The euro also came under pressure in reaction to Fitch Ratings {having lowered] Portugal's credit rating.

While the U.S. dollar could rally and take gold down further in the short run, due to current troubles in Europe, it is unlikely that the U.S. currency will strengthen and gold decline on a consistent basis over the long run. BMO expects gold to be firm over the next two years, with considerable upside risk owing to the massive increases in the U.S. budget deficit. The growing public obligations imply a risk of monetization, which could result in a lower dollar and higher inflation—catalysts for gold investment demand.

Before it's here, it's on the Bloomberg Terminal.