Week of July 19, 2010

INFO THAT HITS US WHERE WE LIVE 

Some analysts feel the homebuyer tax credits artificially boosted the housing market by pushing forward home sales that would have happened later. Others feel most buyers would have bought anyway. In any case, there's now concern about a coming drop in sales. Well, June sales figures should still benefit from activity spurred on by the tax credits. And tax credit sales should even help monthly reports through September, now that buyers in contract on April 30 have been given until September 30 to close.

Nonetheless, we ought to keep an eye on monthly Pending Home Sales, which track signed contracts that turn into sales a few months out. Even though we may have a sales dip after the tax credit, the fact remains that near historic low mortgage interest rates are getting people back into the market. These rates, combined with today's prices, have made homes more affordable than they've been in years, letting many buyers move up to better neighborhoods with more choices.

But buyers shouldn't wait. The National Association of Realtors chief economist sees the median home price rising nationally 2% to 3% this year. The NAR's CEO feels sales will pick up in the fall and that the down-cycle has run its course. The chief economist at Moody's Economy.com also believes the housing crash is nearly over. And we all know mortgage rates won't stay at their current levels indefinitely. In other words, this could be one of the best times to buy a home in decades.

Review of Last Week

UP AND DOWN... The stock market indexes were up nicely through Wednesday, continuing last week's rally, then slipped slightly on Thursday before plunging more than 261 points Friday. For the week, the declines hovered around 1%, not too bad considering the volatile atmosphere of the proceedings on Wall Street.

The problems Friday centered on a drop in the University of Michigan Consumer Sentiment number and soft top-line Q2 revenues from Bank of America, Citigroup, and GE, even though bottom-line earnings from these behemoths beat expectations. The big disappointment came from Google, which missed earnings estimates even though revenue grew a faster than expected 25% for the quarter. But Google was the ONLY major company reporting last week that did not BEAT earnings forecasts.

We also heard complaints about some of the economic data. The trade deficit increased in May, but exports are UP 21.0% in the past year. Yes, May retail sales were off half a percent, but the annual growth rate for retail in the last nine months remains a respectable 6.7%. The Producer Price Index (PPI) and Consumer Price Index (CPI) showed wholesale and consumer inflation down a tad in June. This got analysts fretting about deflation, but both PPI and CPI are actually up from a year ago.

Nonetheless, negative feelings prevailed, so for the week, the Dow ended down 1.0%, to 10097.90; the S&P 500 was down 1.2%, to 1064.88; and the Nasdaq was down 0.8%, to 2179.05.

As stocks slid, the bond market attracted a slew of investors on the proverbial flight to safety. Prices headed north, as the FNMA 30-year 4.0% bond we follow cruised UP 41 basis points for the week, ending at $101.91. Freddie Mac's weekly survey reported that national average rates for conforming mortgages remain at record low levels.

This Week’s Forecast

BACK TO HOUSING... Last week's tsunami of economic data lacked any info on the housing market. This week's reports make up for that, beginning with June Housing Starts and Building Permits on Tuesday. Starts are expected to be down slightly, with permits virtually flat. Thursday we'll see June Existing Home Sales, which may be down a bit. We'll also look at the Leading Economic Indicators (LEI) Index, which could be a tad off for the month.

Q2 corporate earnings reports continue, including: Amazon.com, AT&T, Caterpillar, Coca-Cola, Goldman Sachs, IBM, PepsiCo, and Texas Instruments.

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 July 19 – July 23

Federal Reserve Watch   

Forecasting Federal Reserve policy changes in coming months  According to just about every economist out there, the Fed will probably keep rates at super-low levels for the rest of the year, as inflation is expected to remain benign during that time. Note: In the lower chart, a 1% probability of change is a 99% certainty the rate will stay the same.

Week of July 12, 2010

INFO THAT HITS US WHERE WE LIVE 

Last week's Inside Lending reported that on Friday, the President signed into law a bill that extends to September 30 the closing deadline for claiming the federal home buyer tax credit. We want to add he signed a second bill that retroactively reinstates the National Flood Insurance program, which expired May 31, until September 30.

This news is important for home buyers who are shopping in areas where flood insurance is necessary to get a mortgage. It would obviously behoove these buyers to close before September 30.

National average mortgage rates hit new lows again last week, as reported in Freddie Mac's weekly Primary Mortgage Market Survey. However, the Mortgage Bankers Association revealed that it was refinancing homeowners who were principally taking advantage of these rates, making up the lion's share of last week's loan applications. Incidentally, with these heightened levels of refi activity, the effective rate of all outstanding mortgages was just under 6% in the first quarter of 2010, the lowest on record since 1977.

Review of Last Week

DOUBLE DIP DOUBLE TALK... Lately it's been hard to ignore all the talk about threats of a "double-dip" recession. So last week it was refreshing to see The Wall Street Journal identify all this talk as "exaggerated fears of a double-dip recession." They pointed out: "Growth may be slowing from its first-quarter peak...but most indicators point to continued global growth." Investors quickly came to their senses, stopping the recent stock market slide and sending all major indexes up for the week by 5% and more!

There certainly was adequate support for a more positive economic outlook. The "continued global growth" the Journal mentioned was backed by the latest forecast from the International Monetary Fund. The IMF increased its estimate of 2010 GDP growth from 4.2% to 4.6%. Some fretted that the ISM Services Index dropped a tad from its May reading. But levels above 50 signal expansion, so June's 53.8 shows our non-manufacturing sectors are still experiencing healthy economic growth.

Initial jobless claims came in better than expected for the week, dropping by 21,000. Retailers reported June same store sales, which weren't the debacle some had predicted, with Macy's and Nordstrom actually coming in with some pretty good numbers. Finally, the Q2 corporate earnings season begins this week and first estimates are that profits will be up 34% overall vs. last year. Does any of this sound like a dip to you?

For the week, the Dow ended UP 5.3%, to 10198.03; the S&P 500 was UP 5.4%, to 1077.96; and the Nasdaq was UP 5.0%, to 2196.45.

With stocks rallying, the bond market didn't have such a great time of it. Nonetheless, the FNMA 30-year 4.0% bond we follow was actually UP 22 basis points for the week, ending at $101.50. As noted above, national average mortgage rates tracked by Freddie Mac's weekly survey reached record low levels.

This Week’s Forecast

A DEEP LOOK INTO THE ECONOMY... Economically speaking, this week promises to tell all, except for the housing market. Tuesday's May Trade Balance should stay pretty even, still showing nice export activity. Wednesday's June Retail Sales are forecast to improve on May's readings, a good indication of consumer health. We'll also see if the Minutes of the FOMC Meeting on June 23 reveal anything new about the Fed's economic outlook.

Inflation should remain benign as tracked by the Thursday's wholesale PPI and Friday's consumer CPI. Thursday will also be a big day for manufacturing, expected to stay in recovery mode as measured by the Empire and Philadelphia Fed Indexes, plus Industrial Production and Capacity Utilization. Q2 earnings will come from Alcoa, Intel, JPMorgan Chase, Bank of America, Citigroup, and GE.

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 July 12 – July 16 

Federal Reserve Watch    

Forecasting Federal Reserve policy changes in coming months  Economists are still virtually unanimous in forecasting the Fed will keep rates at present super-low levels through the FOMC meeting in November. Note: In the lower chart, a 1% probability of change is a 99% certainty the rate will stay the same.

INFO THAT HITS US WHERE WE LIVE 

Last Thursday pending home sales, a measure of contracts signed for existing homes, were reported off 30% in May compared to the prior month. This of course was simply the result of the end of the homebuyer tax credit, which required a signed contract by April 30. Common sense tells us many of those April contracts would have happened in May or even later if it weren't for the pressure to qualify for the tax credit.

More good news on the price front, as the Case-Shiller home price index was UP 0.4% in April, seasonally-adjusted, and up a comfortable 3.8% versus a year ago. Case-Shiller tracks home prices in the 20 largest metro areas. This follows the prior week's FHFA home price index, which was UP 0.8%  for April for homes financed with conforming mortgages. Buyers take note.

Friday, the President signed into law a bill that extends the closing deadline for claiming the federal homebuyer tax credit to September 30. The National Association of Realtors estimated that up to 180,000 homebuyers in contract by April 30 could have missed the June 30 closing because of processing delays due to the huge volume of buyers seeking the tax credit.

Review of Last Week

OFF AGAIN... Investors were back in worry mode last week, still concerned about European debt and the speed (or lack thereof) of our own economic recovery. At the Group of Twenty meeting in Toronto, the financial leaders of the world's largest economies didn't say or do much to raise spirits on Wall Street. So stocks slid another week, as investors sold off their equity holdings and sought safer places to put their money.

The week began with May personal income UP 0.4% and personal spending UP 0.2%. For the last six months, personal income is UP 4.6% annually and spending UP 3.8% annually. Overall PCE (consumer inflation) was flat for May, up only 0.9% annually for the last six months. Thursday brought the pending home sales data covered above. This was followed by the ISM index showing manufacturing still grew strongly in June, though slightly below May's reading.

Friday's employment numbers showed a drop of 125,000 jobs for June but April/May revisions added 25,000, so the net loss was 100,000. Furthermore, as the President himself pointed out that morning, the report "...reflected the planned phase out of 225,000 temporary Census jobs, but it also showed the sixth straight month of job growth in the private sector. All told, our economy has created nearly 600,000 private sector jobs this year." Finally, the unemployment rate, expected to edge up a tad, dropped from 9.7% in May to 9.5% for June.

For the week, the Dow ended down 4.5%, to 9686.48; the S&P 500 was down 5.0%, to 1022.58; and the Nasdaq was down 5.9%, to 2091.79.

Bond prices continue to benefit as economic nervousness about the slowness of the jobs part of our recovery has investors seeking the safe haven of bonds. The FNMA 30-year 4.0% bond we follow did well, UP 47 basis points for the week, ending at $101.28. National average rates on three of the four mortgage types tracked by Freddie Mac's weekly survey reached record lows for the second week in a row.

This Week’s Forecast

QUIET AFTER THE HOLIDAY... The shortened post-4th-of-July week will allow us to quietly recover from the pyrotechnic celebrations without a lot of economic data to distract us. Tuesday's ISM Services is expected to show the services part of our economy continuing to expand. Initial and Continuing Unemployment Claims figures will hold our interest after last week's monthly Employment report, and they are expected to drop.
>> 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 July 5 – July 9

Federal Reserve Watch    

Forecasting Federal Reserve policy changes in coming months  As we still lack strong indicators of a recovery in jobs, virtually all economists believe the Fed will keep rates low, probably through the end of the year. Note: In the lower chart, a 1% probability of change is a 99% certainty the rate will stay the same.

Current Fed Funds Rate: 0%–0.25%

After FOMC meeting on:    Consensus
Aug 10    0%–0.25%
Sep 21    0%–0.25%
Nov 03    0%–0.25%

Probability of change from current policy:

After FOMC meeting on:    Consensus
Aug 10 - <1%
Sep 21 - 3%
Nov 03 - 6%