Week of January 31, 2011 INFO THAT HITS US WHERE WE LIVELast week was packed with housing market data and the news does keep getting better even though the media hasn't caught on quite yet. Wednesday saw December New Home Sales UP 17.5%, blowing away forecasts with a 329,000 annual rate. The supply of new homes dropped to 6.9 months and the new homes inventory slid to 190,000, down 66.8% from its 2006 peak and at the lowest level since 1968. More good news came with an 8.5% boost in the median home price versus a year ago, to $241,500, its highest level since April 2008. The average home price registered a 4.7% gain compared to a year ago. Speaking of prices, the Case-Shiller home price index for the 20 largest metro areas was down 0.5% in November, better than expected. Although prices are off 1.6% in the past year, they're still up 1.2% from the low they hit in May 2009. Inspired by the November slip, pundits fretted about a possible "double dip" in housing prices. But a chart of the Case-Shiller index for the 10 largest metro areas shows the trend in prices, adjusted for inflation, is essentially flat, perhaps rising a bit, since early last year. And the nominal value of the index is almost 5% ABOVE its April 2009 low. A rational mind might conclude housing prices have finally bottomed, 5 years after hitting their peak. Buyers are supporting this notion, sending Pending Home Sales, tracking contracts signed on existing homes, UP 2.0% in December. This report has now had three strong months in a row, so existing homes sales, tracking actual closings, should stay on the increase in January. Review of Last WeekLET'S NOT GET CARRIED AWAY... Just as we were all set to celebrate an eight-week winning streak for the stock market, Friday treated us to the biggest one-day drop in months, with the Dow falling 166 points on fears over Egyptian unrest. As oil prices rose, investors seeking safety sold off their equity positions, but losses were modest in the end. All three major indexes were down for the week by half a percent or less. The economic data keeps offering encouragement, but Wall Street always first looks to corporate earnings to gauge how we're doing. Last week saw 14 Dow components reporting Q4 numbers and 11 of them did better than expected. Some missed their revenue targets and issued lukewarm guidance going forward. But overall, the corporate earnings picture continues to show a preponderance of strong performances in spite of the slow rate of economic recovery. Durable Goods Orders were down in December but this was almost all due to a drop in volatile civilian aircraft. Orders for "core" capital goods are actually UP two months in a row. Weekly initial jobless claims were up, but they included the prior week's claims that were delayed by snowstorms in the South. Housing showed the upbeat signs mentioned above. Best of all, the first estimate for Q4 GDP came in at a 3.2% annual growth rate. This was a little lower than expected, but exports were super strong and consumer spending was UP a very healthy 4.4% annually, its fastest rate in almost five years. For the week, the Dow ended down 0.4%, at 11824; the S&P 500 was off 0.5%, to 1276; but the Nasdaq dropped just 0.1%, ending at 2687. Bonds prices were helped by some well-received auctions Wednesday and Thursday, followed by the flight to safety on Friday, courtesy of falling stocks. The FNMA 4.0% bond we watch ended UP 78 basis points for the week, closing at $99.09. This bodes well for mortgage rates, although Freddie Mac's weekly survey of conforming mortgages reported average fixed-rate mortgage rates inching up slightly, thanks to the strengthening economy. Still, mortgage rates do remain at super low levels. This Week’s ForecastFOCUSING ON WHAT THE FED FOCUSES ON... The Fed has a dual mandate of controlling inflation and supporting job growth. What happens with the Fed Funds Rate depends on what's going on in those two areas, which bracket this week's economic news. Monday, we get the Fed's favorite inflation gauge, Core PCE Prices, expected to stay well under control. Friday's January Employment Report is forecast to add 150,000 jobs, which is all to the good, but not enough to prevent the unemployment rate from edging up a tad as the workforce grows. Other key economic indicators include Monday's Chicago PMI take on Midwest manufacturing, Tuesday's ISM manufacturing index and Thursday's ISM services index. All are expected to continue to show expansion, with readings over 50. The Week’s Economic Indicator CalendarWeaker 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 January 31 – February 4 
Federal Reserve Watch Forecasting Federal Reserve policy changes in coming months The Fed's statement coming out of last week's meeting continued to tout their view that the Funds Rate needs to stay at its rock bottom level until the recovery picks up considerably. This week's economic reports shouldn't inspire the Fed to hike the Rate any time soon. Note: In the lower chart, a 1% probability of change is a 99% certainty the rate will stay the same. 
Week of January 24, 2011 INFO THAT HITS US WHERE WE LIVEThursday saw Existing Home Sales shoot up 12.3% in December, to an annual rate of 5.28 million, well ahead of the 4.87 million rate the consensus expected. Overall, existing home sales are off 2.9% compared to a year ago, but that's when sales were artificially boosted by the homebuyer tax credits. All regions showed sales gains in single family homes, condos and coops.
The supply of existing homes dropped to 8.1 months from 9.5 months in November. The pace of existing home sales is up 38% since July and sales are now only around 5% off the long-term trend, which has been a 5.5 million annual pace. All this has happened without government tax credit support. Smart buyers don't want to miss out on housing affordability that's at its highest level in 40 years.
Earlier in the week we saw housing starts drop 4.3% for December to a 529,000 unit annual rate. But colder temperatures and more snow than usual slowed starts in many parts of the country. Home completions actually increased for the month, while building permits shot up a strong 16.7%, to a 635,000 annual rate. We're not out of the woods yet, as permits are off 6.8% from a year ago and starts are down 8.2% compared to last year. Review of Last WeekSHORT WEEK FALLS SHORT... The holiday shortened week ended its four days of trading with only the Dow ahead, the S&P 500 and the Nasdaq both dropping a bit. What bothered investors were some Q4 corporate earnings that fell short, plus more worries that China will hike its interest rates to cool down an overheating economy, already growing at about a 10% annual rate.
Earnings disappointments included a couple of the big financials, although three others in the sector beat expectations. Beyond that, General Electric, IBM, and Google all reported strong, better than expected Q4 earnings. GE even went so far as to forecast increasing profits in the years ahead. Apple then showed up to hit the ball out of the park with Q4 revenues up 70.5% year over year, blowing estimates out of the water with ease. But it was unfortunate to learn that Apple CEO Steve Jobs is taking another indefinite leave to deal with health challenges.
The Empire State Index, which gauges manufacturing in New York, grew to 11.9 in January from 9.9 the previous month, reflecting manufacturing gains across the country. New weekly unemployment claims dropped by 37,000, putting the four-week moving average at 412,000, its lowest level since July 2008. Meanwhile, continuing claims dropped to 3.86 million, their lowest number since October 2008. The Philadelphia Fed Index of manufacturing activity in that region was down in January, but the Leading Economic Indicators (LEI) index was up, better than expected.
For the week, the Dow ended up 0.7%, at 11872; the S&P 500 was off 0.8%, to 1283; and the Nasdaq dropped 2.4%, ending at 2690.
Bonds were under pressure last week, with yields going up as prices headed down. The FNMA 4.0% bond we watch ended down 83 basis points for the week, closing at $98.31. According to Freddie Mac's weekly survey of conforming mortgages, average fixed-rate mortgage rates changed little, remaining at super low levels. Tame inflation is the reason, with core consumer prices compared to December 2009 up a paltry 0.8%, their smallest yearly gain since 1958. This Week’s ForecastTHE FED, PLUS OUR FAVORITE TOPIC... There's another Fed meeting this week to grab everyone's attention, but no one expects a hike in the Funds Rate quite yet. The FOMC statement will be closely examined to see how the nation's central bank views our economic recovery. The housing part of that recovery will also be covered with Wednesday's December New Home Sales, expected to be up slightly from the prior month. But Thursday's Pending Home Sales for November should be down slightly for existing homes.
The week is bookended with readings on the consumer. Tuesday's Consumer Confidence and Friday's Michigan Consumer Sentiment are both forecast to be improving in January. Finally, we close the week with the advanced Q4 GDP number, expected to come in at a solid 3.8% annual growth rate.
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 January 24 – January 28  Federal Reserve Watch Forecasting Federal Reserve policy changes in coming months Rumblings have begun that the Fed is sure to hike the Funds Rate in the second half of the year. But with inflation still well under control, economists do not expect any rate increases for the next few months. Note: In the lower chart, a 1% probability of change is a 99% certainty the rate will stay the same. 
Week of January 17, 2011 INFO THAT HITS US WHERE WE LIVE Down in Orlando, Florida, last week there were more housing market forecasts for the year just begun. Bottom line? Housing economists are cautiously optimistic about a recovery during 2011. These economists were presenting their views at the annual meeting of the National Association of Home Builders (NAHB). None of the experts see a robust upturn for housing. But they do feel that home sales, which have been in a bit of a stall, may start to recover soon.
The prevailing opinion is that the residential market should pick up in the spring, thanks to low mortgage rates and home prices at bargain levels. The NAHB's chief economist feels that recent economic indicators are "signifying growing consumer confidence." These indicators include job creations, good retail sales, and increasing purchases of big ticket items like cars and furniture. Freddie Mac's chief economist sees home prices bottoming in the first six months. He expects mortgage rates to edge up slightly but still remain at historically low levels. Overall, home sales are forecast to be up from 4% to 10% year-over-year and for new construction to be up by 20%. Review of Last WeekTHINGS KEEP LOOKING UP... Investors seem to be more positive about the U.S. economy and the European financial situation. They articulate those views by trading stock prices up and last week, they sent the Dow, the broadly based S&P 500, and the tech-heavy Nasdaq UP by solid percentages. Across the pond, Portugal, Italy, and Spain got some much needed support. Over here, Q4 corporate earnings season got off to a good start, supported by some encouraging economic data.
A slight glitch in the proceedings came from an increase in weekly unemployment claims to 445,000. But the four-week moving average is at 417,000 and continuing unemployment claims dropped by 248,000 to 3.88 million, the lowest it's been since October 2008. Strongly positive economic signs came from a shrinking trade deficit, with exports running ahead of imports over the past year. Inflation appears to be in check, as measured by Core CPI, the Fed's key reading on the matter. This means the Fed Funds rate can stay at its current low levels.
Retail sales were up slightly less than expected for December, but they did reach an all-time high, surpassing the November 2007 figure. For the last year, retail sales are up almost 8% and they've been growing at a 13% annual rate the past three months. In corporate Q4 earnings news, major players Alcoa, JPMorgan Chase, and Intel beat estimates and issued better than expected guidance going forward.
For the week, the Dow ended up 1.0%, at 11,787; the S&P 500 went up 1.7%, to 1,293; and the Nasdaq shot up 1.9%, ending at 2,755.
Bond prices went on an up and down trip last week, with varied results at the finish. The FNMA 4.0% bond we watch ended virtually flat, down 4 basis points for the week, closing at $99.14. According to Freddie Mac's weekly survey of conforming mortgages, average fixed-rate mortgage rates dropped for the second week in a row. The national average rate for 30-year fixed rate mortgages hit a four-week low after their slight uptick at the end of last year. This Week’s ForecastHOUSING, MANUFACTURING, THE ECONOMY OVERALL... Financial markets are closed Monday in observance of Martin Luther King Day. The rest of the week features some measures of the housing market. Wednesday's December Housing Starts and Building Permits will show us the mindset of home builders. Starts are forecast to be down a little, but the weather wasn't conducive to breaking ground in many regions of the country. Permits indicate starts a month or two out and they should be up a little, the same as December Existing Home Sales, coming on Thursday.
Manufacturing is expected to expand in the New York region, as measured by Tuesday's Empire State Index, but Thursday's Philadelphia Fed Index may show a slight manufacturing contraction. Also that day, the Leading Economic Indicators (LEI) Index for December is forecast to continue to improve, although at a slightly slower rate than the previous month. The Week’s Economic Indicator Calendar
Federal Reserve Watch Forecasting Federal Reserve policy changes in coming months With inflation still under control, economists expect the Fed to keep the Funds Rate at its super low level well into the year. The experts feel the economy is not yet strong enough to handle a rate hike just yet. Note: In the lower chart, a 1% probability of change is a 99% certainty the rate will stay the same. 
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