FX.co ★ Dollar will rise this session, but is the news from the US so good? Citi is also pessimistic

Consumer confidence in the US increased in October. This came as a surprise to economists, who set the bar at 108.3 points. The markets are also happy about the news about real estate sales. However, what is really hidden behind the numbers? Citi joins the chorus of pessimists.

The dollar will rise this session, but is the news from the US so good?

Consumer confidence in the US increased in October. This came as a surprise to economists, who set the bar at 108.3 points.

The index declined for three consecutive months, reflecting bulls' pessimism about price growth. However, the United States has significant reserves of fossil fuels, so the energy crisis raging in the rest of the world has affected the world's leading economy less than other countries. However, stock market prices are the same for everyone, and this is also reflected in consumer and investor sentiment.

Still, although consumption and the carbon footprint may grow significantly this winter thanks to crypto miners who have moved from China to the stronghold of democracy, the prospects for Americans are the most rosy.

There is a popular opinion that this time concerns about high inflation were offset by an improvement in the prospects of the labor market. However, US news channels are amicably reporting a huge shortage of staff. Of course, this is traditionally regarded by investors as a signal of economic recovery. But it may also reflect the structural problems of the labor market. Especially considering that previous data suggests that Americans are going to save on Christmas gifts and entertainment.

This may indicate an acceleration in economic growth at the beginning of the fourth quarter, if confirmed by other indicators. However, this may also reflect a seasonal surge reflecting preparations for winter: the purchase of firewood and fuel, winter tires, and the preparation of buildings for winter. These expenses are necessary, and it is quite difficult to judge the general trend by them. Just as the index of services in the US has also grown, and yet it hides quite dangerous trends.

The US real estate market is growing

Sales of new single-family homes in the United States rose significantly in September, reaching a six-month high. However, analysts note that the higher price of housing makes the purchase of housing less affordable for some buyers, especially young ones.

Sales of new homes jumped as much as 14.0% to 800,000 units per year on a seasonally adjusted basis last month, the highest level since March, the Commerce Department said on Tuesday. The pace of sales in August was reduced to 702,000 units from 740,000 units.

Sales increased in the densely populated south, as well as in the west and northeast. However, they fell in the Midwest.

Of course, this reflects the desire of Americans to move to areas with a milder climate, to purchase more affordable housing and to be closer to large cities where there is work. The first factor should especially alert experts on consumer prices, since housing in the south can be purchased to save on heating.

Indeed, a rosy report on the acquisition of real estate may hide not the demand generated by the excess of accumulated funds, but also the demand generated by necessity.

But even the first type of demand can bear sad fruits, because the fact that potential investors are "burying funds in shelters" by purchasing real estate, traditionally considered a good insurance asset, will surface in the next months and hit with data.

Previously, economists had predicted that new home sales, which account for more than 10% of U.S. home sales, would rise to 760,000 units. In September, sales fell by 17.6% year-on-year. However, September is traditionally a difficult month.

In January 2021, sales peaked at 993,000 units, which is the highest since the end of 2006.

And this indirectly confirms our assumptions that the rapid growth of sales in this sector may reflect not an optimistic, but a more pessimistic attitude of Americans.

Judge for yourself, the demand for housing increased sharply at the beginning of the COVID-19 pandemic amid a mass flight from cities to suburbs and other areas with low population density, as Americans were looking for separate or spacious premises for home offices and online training. The shopping frenzy subsided in the summer, as workers began to return to their jobs in May.

Now we can observe not positive growth, but growth associated with Americans' fear of difficulties associated with inflation and a possible new wave of the epidemic.

One should also take into account such a moment: the average price of a new house increased by 18.7% in September to $408,800 compared to last year. Sales continued to concentrate in the price range from $200,000 to $749,000. Sales in the price category below $200,000, a popular segment of the market, accounted for only 2% of transactions.

The last point means that the poor have no savings left at all. They were particularly hit by the cancellation of state programs of social support. This gives us a picture of the financial exhaustion of certain segments of the population by income.

About 74% of the homes sold last month were under construction or had not yet been built. There were 379,000 new homes on the market– a figure unchanged from August. Houses under construction accounted for 62.5% of the inventory, while those not yet built accounted for about 28%.

Of course, builders are experiencing difficulties due to the lack of basic resources, such as copper and steel, due to strained supply chains. Lumber remains expensive, while labor and some household appliances are also in short supply.

The season for construction work in the middle latitudes is coming to an end soon. If supply disruptions become critical, buyers will have to pay extra for materials in order to be on time, and real estate prices may also rise taking this factor into account.

Last week, the government announced that construction of new housing began in September, but the number of building permits fell.

At the pace of sales in September, it will take 5.7 months to clear the supply of homes on the market, compared with 6.5 months in August. However, most likely, demand will weaken in the spring along with a decrease in the number of new cases this winter.

Real estate sales are growing all over the world, despite local difficulties, which may also indirectly indicate a negative assessment of the near-term prospects on the part of investors. This is evidenced by the accusations against officials who failed to ensure equal rights of households and large investors in pursuit of coveted meters. This intensity indicates that people are in a hurry to invest money, as well as the fact that there is a great demand for real estate from investors.

Rents are also rising, fueling Americans' inflationary expectations.

Nevertheless, the market interprets this news as definitely good. Therefore, the dollar is likely to grow on the background of positive (conditional) news.

Currency pairs on October 26, 2021

The US dollar is currently trading in a narrow range on Tuesday as markets await news from central banks. It is unlikely that they will hear something fundamentally new, but the sale of two-year US bonds can change the mood of investors, depending on the interest in the auction.

The US dollar index was stable at 93.8330. It hovered halfway between a one-year high of 94.563, having also reached a one-month low of 93.483 earlier this month.

Positive news can help break through to a new frontier, leaving the euro, the Brazilian real and the pound behind.

The yields of 10-year government securities of the United States and Germany also remained in narrow ranges, while the yield of US bonds was 1.6361% in the morning session in New York.

The Bank of Canada is meeting on Wednesday, and the European Central Bank and the Bank of Japan are meeting on Thursday. Next week belongs to the US Federal Reserve, the Bank of England, the Reserve Bank of Australia and the Bank of Norway.

The euro exchange rate did not change and amounted to $1.1610.

The pound rose to more than $1.38 after British retailers reported stronger-than-expected sales in October, confirming the prospect of higher rates. However, investors may have correctly assessed the growth of "winter-preparatory" spending. Therefore, the pound rolled back and stood at $1.3794, still showing an increase of 0.2% for the day.

The Australian dollar, which tends to move along with commodity prices, rose 0.3% to $0.7514. Last week, it traded above $0.75 for the first time since July.

The US dollar rose 0.4% against the Japanese yen. The BoJ is expected to continue its stimulus programs and lower its inflation forecast this year, according to the results of Thursday's meeting, showing that it does not intend to follow other central banks abandoning pandemic policies.

The Canadian dollar rose slightly against the US dollar on Tuesday as oil prices rose, but the upcoming meeting of the Bank of Canada may make adjustments. The Bank of Canada is expected to raise its inflation forecast, and largely put an end to the incentives that emerged in the era of the pandemic.

At the moment, the currencies of energy exporters, due to the high cost of fuel, are preparing for tightening - for example, the Canadian dollar or the Norwegian Crown will be affected earlier than others, oil market strategists noted.

The ECB is likely to confirm its forecasts, while US GDP data on Thursday may reflect a slowdown in the pace of economic recovery.

"The ECB's continued reluctance to raise rates is putting pressure on the euro as other G-10 central banks embark on transition periods," wrote currency analyst Lee Hardman.

Citi warns...

Interestingly, according to Citigroup Inc., the fourth quarter of 2021 may be the most successful in the future. This forecast is made after Citi economists lowered their forecast for global growth next year to 4.2% from 4.4%.

Strategists led by Mert Genc say global earnings per share will grow by just 5% in 2022, which is less than the current seven percent growth rate and well below the 50% growth expected in 2021.

Analysts believe that the markets may soon switch to a "net decline mode", for the first time since July 2020. And although this is "not necessarily fatal for the markets," it still gives cause for concern, the strategists wrote in a note. According to them, the industries and countries that depend most on China's resources are the most vulnerable, citing the mining sector, Australia and Germany.

UBS Global Wealth Management Chief Investment Officer Mark Haefele is more positive. He sees global earnings per share growth of 9% next year and further growth potential for stocks against the backdrop of continued steady growth in the global economy.

Despite differing views, both Citi and Haefele recommend that investors buy financial instruments - either because they benefit from higher bond yields, or as beneficiaries of economic growth. And for both, healthcare is their preferred protective sector in case the situation worsens.

Indeed, shares of pharmaceutical companies are a good way to make money on long positions, securing their assets and riskier transactions.