Wall Street fears the worst as US housing sales continue to fall

Simon Evans
Sunday 24 August 2008 00:00

Wall Street will this week brace itself for further disappointing figures from the US housing arena when numbers for sales of existing and new homes are released on Monday and Tuesday.

After economic data last week showing the UK on the brink of recession, attention will be on the US, with minutes from the Federal Reserve's interest rate-setting committee and GDP numbers also due to be released.

Worse than expected figures are likely to rein in the US dollar, which has soared against the pound recently. Economists predict that sales of new homes in the US will have once again fallen back in July to around 525,000, a further fall from June.

On Friday, the Federal Reserve chairman, Ben Bernanke, gave a much-needed fillip to Wall Street when he claimed that the threat of inflation in the world's biggest economy had receded. A combination of lower growth, lower oil and commodity prices and a strong dollar had, he said, all contributed to reducing the threat of spiralling prices.

His comments came as speculation grew that the US Treasury, led by the Treasury Secretary, Hank Paulson, is set to bail out the failing mortgage giants Freddie Mac and Fannie Mae, with a further package that most believe to be quasi-nationalisation. The investment guru Warren Buffett said "the game was now over", since the government's blank cheque had encouraged riskier lending, meaning that investors in the groups were likely to lose all their money.

Talk of a bailout for Freddie and Fannie came alongside rumours that the ailing investment bank Lehman Brothers could be bought by the Korea Development Bank.

Meanwhile, in the UK, figures from the Office for National Statistics showed zero economic growth in July. The statistics suggest that Britain's economy is teetering towards the official definition of a recession – two quarters of negative growth. The downward revision brought to an end a 16-year run of growth in the UK and prompted a further weakening of sterling to its lowest levels against the euro for 12 years.

Economists warned that stagnation had made a cut in the cost of borrowing, currently at 5 per cent, more likely. The Bank of England's Monetary Policy Committee meets on 4 September to decide the direction of rates.

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