US stockmarkets perked up ahead of President Bush's last State of The Union speech later today and the start of the Fed's two day meeting in Washington.
The small rebound went against the weaker trend in Europe and a series of plunges on Asian bourses. Japan's Nikkei lost 4%. China's CSI 300 Index slumped a nasty 6.8%, while Hong Kong's Hang Seng Index shed 6%. In Europe France's CAC 40 slid 0.6%; London's FTSE 100 lost 1.4% and Germany's DAX gained less than 0.1%.
The Dow finished up more than 1.4% or around 170 points as investors anticipated (as they do) another rate cut from the Fed this week.
But US investors also ignored poor sales figures from fast food giant McDonald's, figures that in another week would have made markets swoon as it shows that consumers have even chopped back spending on some types of food.
But the major news shrugged off by complacent US investors was new home sales figures for December and 2007 which showed last year was the worst on record.
Sales of new homes fell last year by 26%, the steepest drop since records began in 1963, according to figures from the US Commerce Department.
Investors were so focused on the Fed and the next rate cut that they failed to see the importance of these figures: the slump in December came despite the rate cuts by the Fed from September. So not even falling interest rates can tempt sufficient US homebuyers into the market to stabilise demand.
It was also a story we saw last week with the report on sales of existing homes.
For the time being you'd have to question if the rate cut by the Fed last year, and any further trimming this week, will have any impact on housing demand until later in the year.
US banks are signalling their views on likely demand: they have sacked thousands of employees in their home loan and mortgage origination and securitisation businesses. They are factoring in a big drop off this year compared to 2007.
The figures for December help explain why. Purchases of new homes in the US unexpectedly fell to a 12-year low last month, signaling little prospect for a recovery.
Sales fell 4.7% to an annual pace of 604,000, while the median price dropped 10% from December 2006, the biggest fall in 37 years.
Economists had forecast new home sales would be unchanged from an originally reported 647,000 rate the prior month, according to a Bloomberg survey. That was too optimistic.
Even as builders cut their inventories, the fall in December stocks failed to keep pace with the decline in sales, pushing up the month's supply. At the current sales pace, it would take 9.6 months to sell all those unsold houses: that's the highest backlog for more than 20 years.
Purchases dropped in three of four regions, led by a 6.5 percent decline in the South. The Northeast was the only region that registered a gain.
In making the emergency rate cut last week the Fed said "incoming information indicates a deepening of the housing contraction'' and “a weakening of the economic outlook,'' in announcing the decision.
So today's news adds to expectations the Fed will cut rates by half a per cent this week.
Sales of previously owned homes, which account for about 85% of the overall market, fell more than forecast in December, capping the biggest yearly slump in more than a generation, America's National Association of Realtors said last week.
New-home purchases are considered a timelier indicator because they are based on contract signings, while existing home sales are calculated when a contract closes, usually a month or two later.
According to a forecast by the US Mortgage Banker's Association new home purchases will drop another 15% this year and sales of existing homes will drop 13%.
