Week of May 31, 2010

INFO THAT HITS US WHERE WE LIVE 

For the third month in a row, Existing Home Sales beat expectations, UP 7.6% for April and UP 22.8% over a year ago. A lot of the gain was put to the tax credit expiration that required a signed contract by April 30. But buyers have till June 30 to close, so observers feel sales will probably increase for the next couple of months, then take a short break before rising again.

Inventories were up from 8.1 to 8.4 months, but this is similar to April gains in prior years, rather than evidence of some huge "shadow inventory" hitting the market. Meanwhile, the median price for an existing home went to $173,000, up 4.0% from a year ago.

April New Home Sales shot UP 14.8%, reaching a 504,000 annual rate, their highest level since May 2008. The supply fell to 5.0 months in March and inventories dropped to 211,000 -- their lowest level since 1968, down 63.1% from their mid-2006 peak. The tax credit expiration also contributed to these great numbers. But the fact remains, new homes are now significantly more affordable, thanks to prices that are the lowest since 2003 and extremely low mortgage interest rates.

Two home price indicators gave mixed signals. The Case-Shiller index for the 20 top metro areas was down 0.5% for March but UP 2.3% for the year. The FHFA price index for homes bought with conforming mortgages was UP 0.3% for the month but down 2.2% for the year.

Review of Last Week

THANK YOU, CHINA... Call it a somewhat volatile week in the stock markets, as investors continued to fret over Europe's financial health, the Gulf oil spill and North Korea. Then Thursday China stepped in as a solid buyer of Eurozone bonds, giving Wall Street ample reason to calm down, leaving two major indexes up for the week, with the Dow off just 0.6%.

We continue to get good factory data, with the Richmond Fed manufacturing index at +26 for May indicating continued expansion in the Mid-Atlantic region. The Chicago PMI manufacturing index also showed growth, though slightly slower than the month before. Durable Goods were UP 2.9% for April and UP 18.9% over a year ago. Especially encouraging, orders for capital goods used in production were UP 7.4% for April and UP 30% over a year ago, one of the steepest annual boosts in the last 20 years.

Real Q1 GDP was revised down slightly to 3.0% annual growth. But Q1 corporate profits grew at a 24% annual rate and are UP 31% over a year ago. Economists expect these profits to boost hiring and business investments. Q1 prices were up only 1% annually, so inflation is still under control. April Personal Income came in UP 0.4% and Personal Consumption was flat, but economists feel it's normal for consumers to take a break every few months. University of Michigan Consumer Sentiment was UP to 73.6.

For the week, the Dow ended down 0.6%, to 10136.63; but the S&P 500 was UP 0.2%, to 1089.41 and the Nasdaq was UP 1.3%, to 2257.04.

Bonds also had an up-and-down week, finally recovering on Friday to end in pretty good shape. The FNMA 30-year 4.5% bond we watch closed down 13 basis points for the week, ending at $102.03. National average mortgage rates continued near record lows, according to Freddie Mac's weekly survey. Their Chief Economist feels this should soften the effect of the expiration of the homebuyer tax credit.

This Week’s Forecast

LOOKING FOR JOBS... The economic news of the week is dominated by the May employment report on Friday. Expectations are that a substantial number of jobs will be added, but increases in the workforce population will cut the unemployment rate by just 0.1%. On our way to this big news, we'll be interested to check out April Pending Home Sales, which should continue to show gains. Tuesday's ISM manufacturing read and Thursday's ISM Services and revised Q1 Productivity should also provide more support for our continuing recovery. 

The Week’s Economic Indicator Calendar

Weaker than expected economic data tends to send bond prices up and interest rates down, while positive data points to lower bond prices and rising loan rates.

Economic Calendar for the Week of May 31 – June 4

- Week of May 17, 2010

INFO THAT HITS US WHERE WE LIVE

Last Tuesday the National Association of Realtors (NAR) reported the Q1 median price for existing homes was up in 91 out of 152 metro areas compared to a year ago, showing the housing market is starting to stabilize. This was a nice gain over Q4 of last year when prices were up in only about 40% of the cities tracked. Even more encouraging, the percentage price increases in 29 cities were in double-digits.

The NAR also reported that existing home sales of single-family homes and condos were UP 11.4% in Q1 compared to a year ago. Sales increased in 44 states and Washington, D.C., with over 70% reporting double-digit percentage gains.

Long-term forecasts were also revised slightly downward by the NAR, but the numbers are still good. They see existing home sales UP 4.3% this year and UP 5.1% for 2011, with the median resale home price UP 2.5% for 2010 and UP 3.7% in 2011. New single-family home sales are forecast to rise 6.9% in 2010 and a whopping 42.0% next year. Median new home prices will be up 3.3% this year and 4.7% the next.

Review of Last Week

ANOTHER EUROPEAN TRIP... Europe's fiscal shenanigans were in the news again and they took the markets on a trip north, then turned them sharply south to end the week. The gains came after Sunday's announcement of a major Euro-zone rescue package. But as the week wore on, concerns over whether individual countries would put the necessary austerity measures in place sent stocks down, though the market indexes ended the week with strong gains.

If you could take your mind off Europe, there were plenty of reasons to feel positive about the U.S. economic situation. Wednesday, the March trade deficit came in as expected, up $1.0 billion to $40.4 billion, thanks to the strength of our recovery pushing imports up faster than exports. Best of all, the report showed our total volume of international trade was up 3.1% for the month and up 24% since it hit bottom a year ago April.

On the jobs front, the four-week moving average inched down for both initial and continuing unemployment claims. Then Friday came the news retail sales were UP 0.4% for April and UP 0.9% including upward revisions to February/March. For the last six months, retail sales are up at a 10.7% annual rate, 10.3% excluding autos, showing the consumer is certainly alive and well. Finally, industrial production was UP 0.8% for April, as manufacturing continues to boom, up at a 9.5% annual rate since its low last June.

For the week, the Dow ended UP 2.3%, to 10620.16; the S&P 500 was UP 2.2%, to 1135.68; and the Nasdaq was UP.6%, to 2346.85.

Worried about Europe, investors flocked to the safety and bargains they found in bonds. Friday's drop in stocks pushed bond prices up nicely. So even though we had good economic data on Friday, the week ended on an up note. The FNMA 30-year 4.5% bond we watch closed UP 9 basis points for the week, ending at $101.59. According to Freddie Mac's weekly survey, national average fixed-rate mortgages dipped to their lowest levels of the year.

This Week’s Forecast

HOMES, INFLATION--WHAT'S GOING UP?... Housing Starts and Building Permits reports will tell us where new home construction is headed and the expectation is those numbers will continue to trend upward.  We'll see if inflation is going up too, with the wholesale PPI on Tuesday, followed by consumer CPI inflation on Wednesday. Most experts feel inflation remains under control. The week will be bookended with reads on New York and Philadelphia manufacturing, which should continue to show a strong recovery for the sector.

The Week’s Economic Indicator Calendar

Weaker than expected economic data tends to send bond prices up and interest rates down, while positive data points to lower bond prices and rising loan rates.

Federal Reserve Watch    

Forecasting Federal Reserve policy changes in coming months  Economists are now moving back to the idea the Fed will indeed keep rates where they are for an "extended period" as long as inflation remains in check. Note: In the lower chart, a 1% probability of change is a 99% certainty the rate will stay the same.

- Week of May 10, 2010

INFO THAT HITS US WHERE WE LIVE

Last Tuesday the National Association of Realtors reported pending home sales were UP 5.3% in March over February, and UP 21.1% over March of last year. This gain in contracts on existing homes, following February's 8.3% rise, indicates a nice boost should be coming in existing home sales for April.

Buyers who signed contracts before the end of March now have till the end of June to qualify for their homebuyer tax credit.

In other news, a major mortgage insurance company reported the risk of a decline in home prices decreased in the last quarter of 2009 in 93% of the 384 markets they track. They put this decrease to declining foreclosure starts and improved affordability, thanks to attractive prices, low  mortgage rates and increasing personal income.

Review of Last Week

GREECE, GLITCH, GULP!... The European fiscal situation remained up in the air last week, and Greek protesters made it seem like their government would have real problems selling them the belt-tightening measures a bailout would require. This uncertainty sent stock prices sliding, although some saw this as just a normal market correction after a big bull run.

Then Thursday the sell-off quickly steepened, as stocks fell about 500 points in a matter of minutes thanks to what the exchanges later explained as a "trading glitch." Apparently, today's computerized trading can trigger precipitous price drops when buyers become scarce during big automated sell-offs. Prices rebounded in another ten minutes but the Dow still ended down over 300 points. A correction is a 10% drop and the indexes were well on their way there by the end of the week.  

All this distracted everyone from the great economic data. Personal income and spending were UP in March. PCE consumer inflation rose just 0.1%. ISM Manufacturing was at its highest level since 2004, while ISM Non-Manufacturing expanded four months in a row. Productivity is up at a 6.3% annual rate the last 12 months, its fastest pace in almost 50 years.

Friday we found out 290,000 new jobs were created in April. February/March revisions added 121,000, so the net April gain is 411,000 jobs. In the last four months, civilian employment, which includes self-employed and start-ups, grew by 1.9 million, better than any time during the late 1990s boom. The jobless rate went to 9.9%, all from unusually rapid growth in the labor force, expected to slow.

For the week, the Dow ended down 5.7%, to 10380.43; the S&P 500 was down 6.4%, to 1110.88; and the Nasdaq was off 7.9%, to 2265.64.

The bond market certainly benefited from investors' flight to safety. Unsafe situations ranged from Greece to Wall Street with its down-sliding stocks. Even with the extra-good payroll gains on Friday, bond prices held. The FNMA 30-year 4.5% bond we watch closed UP 66 basis points for the week, ending at $101.50. Freddie Mac's weekly survey reported national average fixed-rate mortgages at their lowest levels in six weeks.

This Week’s Forecast

CONSUMERS CHECK IN... Not a lot of economic data coming in this week, although we will have the important Retail Sales numbers in for April along with Michigan Consumer Sentiment for May. These will happen Friday, but on the way there expect more discussion around and reaction to European financial issues. These of course rile investors, although the economic data on this side of the pond supports the idea of a recovery that's building very nicely thank you.  

The Week’s Economic Indicator Calendar

Weaker than expected economic data tends to send bond prices up and interest rates down, while positive data points to lower bond prices and rising loan rates. 

Federal Reserve Watch    

Forecasting Federal Reserve policy changes in coming months  With the recovery strengthening, a few more economists now see a rate hike in the second half of this year. Of course, inflation remains in check, so Chairman Bernanke can certainly keep rates low for a while longer.

Note: In the lower chart, a 1% probability of change is a 99% certainty the rate will stay the same.