Week of December 20th

INFO THAT HITS US WHERE WE LIVE 

Last Thursday it was good to see that Housing Starts picked up for November, rising 3.9% for the month to an annual rate of 555,000 units. This beat expectations and was especially gratifying because all the gain came from a 6.9% increase in single-family starts. These have now been up three out of the last four months.

Multi-family starts were down for the fourth month in a row, but these are very volatile on a monthly basis. In fact, the 12-month moving average for multi-family starts is still trending higher, up 5.9% compared to a year ago. The demand for multi-unit residences should continue to grow, which is why some observers foresee a large rebound in multi-unit construction in the next few months. Although there are still excess housing inventories, they are falling quickly and experts expect them to drop further, even with a home building recovery.

Review of Last Week

THREE IN A ROW... Investors sent stocks higher for the third straight week on Wall Street. The markets weren't exactly on fire, as volumes were low, which is typical for this time of year, and investors remain guardedly optimistic, which has been their attitude since last month's elections. As happens so often, the week's festivities were driven by the economic headlines and there certainly were plenty to ponder. 

The consumer appears to be showing up for the holidays, as retail sales went up 0.8% in November, up 1.2% excluding autos. Including revisions to September and October numbers, overall sales were up 1.5% for the month. Retail is now UP 7.7% over a year ago, and sales are up at a 12% annual rate for the past five months! On the worrisome side, the November Producer Price Index (PPI) showed wholesale inflation up 0.8%, although the Consumer Price Index (CPI) rose a benign 0.1%. Consumer prices are up 1.1% over a year ago, which is good, but wholesale prices are up 3.5% for the year, which isn't so good if you want to keep inflation in check and interest rates down.

The jobs recovery is key to the housing rebound, so it was good to see new unemployment claims falling again last week, to 420,000. This beat expectations and was the second lowest number this year for weekly claims, which have now fallen three times in the last four weeks. The Philadelphia Fed index showed manufacturing continues to grow in that region, as it was up nicely for December. Likewise, the Empire State index showed New York manufacturing coming back strong in December after last month's dip. November Industrial Production rose above expectations and capacity utilization showed factories at their highest volume levels since October 2008.

For the week, the Dow was UP 0.7%, to 11491.91; the S&P 500 was UP 0.3%, to 1243.91; and the Nasdaq was UP 0.2%, to 2642.97.

With investors feeling more upbeat about the economy, money flowed into stocks and out of the bonds that fund most mortgage loans. The FNMA 30-year 4.0% bond we watch ended down 78 basis points for the week, closing at $98.22. This inched mortgage rates higher once again. Freddie Mac's weekly survey of conforming mortgages had the average 30-year fixed-rate mortgage rate up for the fifth week in a row. Rates are still historically low, but people looking to purchase or refinance should be aware that the low-rate party may soon be over.

This Week’s Forecast

HOUSING, INFLATION AND THE OVERALL ECONOMY... This week we get to see how the economy is coming along in some key areas. We track the housing recovery with Wednesday's Existing Home Sales and Thursday's New Home Sales, both expected to be up a bit for November. Continuing the theme of a steady if slow recovery, the third estimate of GDP should show the overall economy growing at a 2.7% annual rate, up from the prior 2.5% estimate. Again, a slower rate of growth than economists would like to see, but growth nonetheless.

Thursday brings more inflation readings, with both Personal Spending and Core PCE Prices expected to remain under control. The final December reading on University of Michigan Consumer Sentiment may be up a small amount, while November Durable Goods Orders may be down a tad. The markets will be closed Friday.

Happy Holidays to you and yours during this joyous season!

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 December 20 – December 24

Federal Reserve Watch   

Forecasting Federal Reserve policy changes in coming months  The policy statement from last week's FOMC meeting indicated the Fed is not yet convinced the economy is on solid ground. Analysts therefore expect the Fed Funds Rate to stay at its super low level for an "extended period." Inflation, or a stronger economic recovery, could of course start the rate back up. Note: In the lower chart, a 1% probability of change is a 99% certainty the rate will stay the same.

Week of December 13, 2010

INFO THAT HITS US WHERE WE LIVE

Review of Last Week

DRIFTING UP... The Dow moved less than 20 points five days in a row, then finished the week with a 40-point gain. With this kind of flat performance, observers feel the stock market is drifting, rather than surging, higher, yet higher it goes. The S&P 500 in fact ended the week at a two-year high, as investors clearly are feeling a little more upbeat about the economy. 

The centerpiece of the week for many on Wall Street was the tax compromise plan the President arrived at with Republican leaders. Some Congressional Democrats were not happy about the agreement, but investors believe a bill will be passed before January 1 that keeps lower tax rates in place for all taxpayers for the next two years. This is viewed by many as helpful to speeding up the recovery. An extension of unemployment benefits was tied into the deal, which will help those looking for work while the economy heals.

Other hopeful signs included University of Michigan Consumer Sentiment beating expectations, showing people feel better about the economy as of early December. October exports rose to their highest levels in over two years, as the U.S. trade deficit surprisingly fell better than 13%. Exports to China grew almost 30%, narrowing our trade gap with that country by 8.3%. Additional positive news: the government sold its remaining stake in Citigroup; AIG said it would pay back the final $20 billion it owes the New York Fed; and GE announced it will increase its quarterly dividend by 17%.

For the week, the Dow was UP 0.2%, to 11410.32; the S&P 500 was UP 1.3%, to 1240.40; and the Nasdaq was UP 1.8%, to 2637.54.

Bonds got hammered most of the week as stocks edged up. The FNMA 30-year 4.0% bond we watch ended down 120 basis points for the week, closing at $99.00. Yields move opposite to prices, so they went higher and that inched mortgage rates up for another week. As reported above, national average rates for fixed-rate mortgages went north a tad, which isn't horrible in itself, since rates are still at historically low levels.

This Week’s Forecast

LOTS MORE THAN THE FED... We have another Fed meeting on Tuesday and no one expects the rate to move up, although the Fed's policy statement will be carefully read as usual. The central bank's economic views certainly bear watching, but there's lots more in store. Tuesday's Producer Price Index gives us wholesale inflation and Wednesday's Consumer Price Index measures the consumer version, and they're both expected to remain in check. Tuesday's Retail Sales numbers should show a continued, though modest, growth in consumer spending.

Manufacturing gauges are forecast to improve slightly, although the Philadelphia region is expected to decline. Most important to us, November Housing Starts and Building Permits will come in on Thursday and observers expect more activity from builders, although we're still not back to pre-downturn levels.

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 December 13 – December 17

Federal Reserve Watch    

Forecasting Federal Reserve policy changes in coming months  Virtually all experts expect no hike in the Fed Funds Rate at this week's FOMC meeting. The current super low rate level is forecast to hold through the first half of 2011. But the threat of inflation or a speeding up of the economic recovery could start the rate back up. Note: In the lower chart, a 1% probability of change is a 99% certainty the rate will stay the same.

Week of December 6, 2010

INFO THAT HITS US WHERE WE LIVE

Last Thursday the National Association of Realtors (NAR) reported Pending Home Sales for October UP 10.4% over the month before. This index is a measure of signed purchase contracts, which bodes well for Existing Home Sales a couple of months out. The NAR's chief economist commented, "It is welcoming to see a solid double-digit percentage gain, but activity needs to improve further to reach healthy, sustainable levels.

The housing market clearly is in a recovery phase and will be uneven at times, but the improving job market and consequential boost to household formation will help the recovery process going into 2011."

Tuesday, the S&P/Case-Shiller home price index was down 0.8% in September for the 20 largest metro areas in the country. This was the third month in a row the index dipped, but national average home prices are still up 0.6% versus a year ago. Prices are also 3.2% above the May 2009 bottom and some analysts do not expect prices to go below that level. Opinions differ, however. Check out this map on the risk of price declines in various parts of the country.

Review of Last Week

BAD JOBS, GOOD WEEK... The week ended on a November Jobs report that delivered less-than-expected payroll gains and a slightly higher unemployment rate, but Wall Street basically shrugged it off. In fact, there was enough good economic news that investors sent all three stock market indexes UP solidly for the week.

Let's start with those disappointing employment numbers. Non-farm payrolls grew in November by 39,000, but the consensus expected 150,000. But September and October revisions added 38,000 jobs, taking the net gain to 77,000. Payrolls in the private sector were up 50,000, their eleventh straight monthly gain, and prior months' revisions added 6,000, for a net gain of 56,000.

No one was happy to see the unemployment rate creep up to 9.8%, but with growing payrolls, more people are jumping back into an improving jobs market, so the workforce is growing. New weekly jobless claims also grew, but the four-week moving average dropped to its lowest level in over two years.

More obvious good economic news came in the form of the rising October Pending Home Sales figure reported above. Q3 Productivity was also UP 2.3% annually and UP 2.5% over last year. Both Chicago manufacturing and Consumer Confidence numbers were UP and the ISM Services index came in better than expected, as did same store retail sales.

Even all the recent fears over European debt subsided, with the European Central Bank President hinting at more support for the region.

For the week, the Dow was UP 2.6%, to 11382.09; the S&P 500 was UP 3.0%, to 1224.71; and the Nasdaq was UP 2.2%, to 2591.46.

Even though bonds first benefited from the disappointing jobs report, prices eventually came under pressure from money flowing back into rallying stocks. The FNMA 30-year 4.0% bond we watch ended down 89 basis points for the week, closing at $100.20. National average rates for fixed-rate mortgages headed north a tad, according to Freddie Mac's survey of conforming mortgage rates. They're still at historically low levels, but wise buyers and refinancers shouldn't wait.

This Week’s Forecast

TAKING A BREAK... After last week's busy schedule of economic news, we'll be taking a bit of a breather this week. The weekly Initial Unemployment Claims and Continuing Claims will continue to hold our interest and are expected to show a slowly strengthening jobs picture. Friday's October Trade Balance is forecast to hold steady. Right after that, we'll see a reading on the University of Michigan Consumer Sentiment Index, which is expected to keep tracking upward.

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 December 6 – December 10

Federal Reserve Watch   

Forecasting Federal Reserve policy changes in coming months  All the experts still feel the Fed Funds Rate will stay at its super low level through the first half of next year. A threat of inflation, or a strengthening of the economic recovery, of course, could start rates back up. Note: In the lower chart, a 1% probability of change is a 99% certainty the rate will stay the same.