The U.S. housing market, seat of fires now ravaging the world economy, showed unexpected signs of life on Tuesday, but analysts warned against any hasty predictions of a sustained recovery.
Germany also offered unforeseen hints of optimism while Asian powerhouse Japan, its economy shrinking at twice the pace of the United States and the eurozone, acted to spur lending by extending banks up to $10 billion in support.
A monthly poll by the ZEW economic institute in Germany, Europe’s biggest economy, showed analyst and investor sentiment rising to -3.5 in March from -5.8 in February. The index had been expected to fall, reflecting plummeting global demand for traditional German products such as cars and machinery.
‘The bottom of the recession is likely to be reached this summer. The economic situation is extremely bad, but there are first signs of hope,’ said ZEW chief Wolfgang Franz.
Political leaders, struggling to coordinate stimulus packages in battling the worst world recession since the 1930s, recognise the importance of the intangible factor of investor sentiment and confidence in driving any recovery.
Isolated data can weigh heavily. Anything to do with the U.S. housing market and its finances carries potent symbolic importance.
Official figures showed U.S. housing starts—new building—surging 22.2 percent in February. That marked the first increase since April of last year, before troubles in the U.S. mortgage market prompted the full-scale financial crisis now ripping through world trade and industry.
‘That is an encouraging sign for the U.S. economy...With the rally in equities, we hopefully have seen a bottom for the economy here,’ said Matt Esteve, foreign exchange trader at Tempus Consulting in Washington.
Others, surprised by the strength of the data, suggested it could have been distorted by some exceptional circumstances such as weather or the steep nature of the decline in recent months.
‘It doesn’t tell us anything yet. What you’re trying to figure out here is the bottom. It takes more than one data point to make that determination. The healthy thing that is real is how the market reacts, and it’s holding up OK,’ said Tom Alexander, head of Alexander Trading in Savannah, Georgia.
U.S. stocks were set to open flat to slightly higher on the housing starts data and hopes banks might be stabilising.
Underlying industrial figures, however, remain grim.
U.S. industrial production fell for the fourth straight month in February. Moreover, a report from the New York Federal Reserve Bank said an index of manufacturing in the state fell to a record low in March.
Germany’s IWH research institute revised its 2009 prediction for economic contraction from 1.9 percent to 4.8 percent as export demand tails off.
The Bank of Japan, stewarding the world’s second-biggest economy, announced it would buy up to 1 trillion yen ($10.2 billion) of higher risk subordinated debt issued by banks to help bolster their capital and free up lending to companies and households. Subordinated debt ranks after other debt should a company fall into receivership or be closed.
BoJ Governor Masaaki Shirakawa said the programme was aimed at those facing big risks from falling stock prices after a 42 percent drop in the benchmark Nikkei index last year.
‘Banks seem for the most part to have passed the crisis stage,’ said Rick Meckler, president of investment firm LibertyView Capital Management in New York. ‘But while the financial sector has found a level of stability, the problem is that the rest of economy weakened over the last several months.’
Continuing battle
European stocks stumbled in early trade on Tuesday after five days of gains, highlighting the fragility of financial markets. Falls were driven by oil companies and by banks, beneficiaries of recent rises, on concern over rising credit card defaults in the United States.
‘It is the continuing battle between the recovery and the economy and the realisation that corporate results are still going to be poor for the time being,’ said Justin Urquhart Stewart, investment director at Seven Investment Management.
Both the BOJ and the U.S. Fed, beginning two-day meetings on Tuesday, look certain to keep their benchmark rates at 0.1 percent and 0-0.25 percent respectively when they announce their policy decisions on Wednesday.
They are also expected to highlight how much they have already done to jolt their economies back to life, with a stock market rally inspired by improved bank outlooks taking some pressure off the policymakers to act quickly again.
Tokyo stocks gained 3.2 percent on Tuesday, anticipating the BoJ move on debt purchases.
A report by American Express Co that more and more Americans were falling behind in their credit card payments served as a reminder of the toll the financial crisis is taking on U.S. consumers and snapped a four-day rally on Wall Street.
