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This arti­cle is a guest con­tri­bu­tion by David Rosen­berg, Chief Mar­ket Econ­o­mist, Gluskin Sheff.

MARKET COMMENT

Per­haps it wasn't unusual to see new home sales trail off in the after­math of the expiry of the hous­ing tax cred­its but the mag­ni­tude was very sur­pris­ing. More­over, since mort­gage appli­ca­tions for new pur­chases through the first three weeks of June are a huge 15% below May’s tally, this mas­sive slump in home sales is not exactly a one-month won­der either. New home prices are down 10% year-to-date and one has to won­der whether yesterday’s mes­sage in the post FOMC press state­ment was the first hint of an even­tual return to quan­ti­ta­tive easing.

As for the mar­kets, every­thing seems to be bounc­ing off the 50-day mov­ing aver­age – the S&P 500, oil, and the U.S. dol­lar. The stock mar­ket is down 2% for the year in what looks to be a very impor­tant top­ping for­ma­tion. That was not expected at the start of the year, that much is for sure.

The really big story is in the bond mar­ket. The yield on the 10-year T-note yield and the long bond, after yesterday’s rally, is down to lev­els that are below those pre­vail­ing when the Fed was busy build­ing the fire­wall against defla­tion back in mid-2002. Back then, the Fed cut rates (75 basis points dur­ing that bor­der­line double-dip), the gov­ern­ment could cut taxes, and for good stim­u­la­tive mea­sure, go to war. And of course, we had Con­gress turn a blind eye towards the credit excesses that pro­vided fur­ther juice with lever­age ratios among Wall Street banks and the GSEs that ranged from 30% to 70%.

Look at what we have today: No room to cut rates. No room – let alone ide­ol­ogy – to cut taxes. And, in con­trast to start­ing a new war, the U.S. is going to be pulling troops out of Afghanistan, which is a good thing for the troops and their fam­i­lies, but in terms of GDP impact it does rep­re­sent fis­cal with­drawal. The options to resus­ci­tate the econ­omy when it – no longer an if – enters a 2002-03 style growth col­lapse are extremely thin. And, they prob­a­bly lie on the Fed’s bal­ance sheet, which means the bond-bullion bar­bell will likely remain a viable strategy.

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