INFO THAT HITS US WHERE WE LIVE Tuesday we had Pending Homes Sales, which after dropping 30% in May, fell just 2.6% in June, with the push to qualify for the tax credit no longer a factor. These figures indicate there should be a drop in Existing Home Sales come July and maybe again in August. But some analysts feel that after this post-tax-credit dip, housing will come back solidly, just like auto sales did after “cash for clunkers” expired last year.

The report did include encouraging words on home pricing from the National Association of Realtors chief economist: “…since home prices have come down to fundamentally justifiable levels, there isn’t likely to be any meaningful change to national home values. Some local markets continue to show strengthening prices.” We all know you can’t time a bottom, but it looks like serious buyers might want to act now.

The Mortgage Bankers Association reported an increase in demand for purchase loans for the third week in a row. Its Weekly Mortgage Applications Survey had purchase loan demand UP 1.5% for the week ended July 30.

>> Review of Last Week

SUMMER RALLY LITE… Coming off July’s hot month for stocks, August began with a 208-point gain in the Dow. But before this summer rally could really take off, investor optimism cooled, sending market indexes up and down by small amounts for the rest of the week. Friday’s July jobs report came in below expectations, which drove stocks lower, though only by 21 points. All major indexes ended UP for the week, so it’s still a rally, if not a particularly strong one.

What made investors cautious included the July ISM Manufacturing Index, which fell from June’s 56.2 reading to 55.5. Wall Street ignored the fact this is still a strong number, above the 50 level that signals expansion. Then Personal Income and Consumption came in unchanged for June. But income after taxes is UP 3.2% annually the last six months and “real” (inflation-adjusted) consumer spending was UP 0.1% for June and UP 1.6% annually the last six months. PCE consumer inflation dropped for the third month in a row, but core PCE, excluding food and energy, is up 1.1% the last six months, calming fears of deflation.

Wednesday, July ISM Services climbed to 54.3 from 53.8 in June, showing continued expansion in the non-manufacturing arena. Now for the July jobs report. Private sector payrolls grew less than expected and government payrolls declined more than expected. But private payrolls are up 90,000 per month since the beginning of the year. In addition, average weekly earnings are UP 0.5% for July and UP 3.0% in the last year, which should continue to drive up consumption and the economy. The unemployment rate held at 9.5%.

For the week, the Dow ended UP 1.8%, to 10653.56; the S&P 500 was UP 1.8%, to 1121.64; and the Nasdaq was UP 1.5%, to 2288.47.

Bonds ended the week well, with the headline numbers in the July jobs report attracting safe haven investors who sent prices up. Mortgage bonds did especially well, with the FNMA 30-year 4.0% bond we follow heading UP 34 basis points for the week, ending at $102.75. Freddie Mac’s weekly survey of conforming loans showed national averages for fixed-rate mortgages down for the seventh week in a row.

>> This Week’s Forecast

THE FED, THE INFLATION, THE CONSUMER…Tuesday is Fed day, as the nation’s central bank comes out of another meeting where they look at the economy and decide what to do about the cost of money. No one expects the Fed Funds Rate to budge from its current rock bottom level. But the FOMC policy statement will be carefully scrutinized to see if any changes in wording shed useful light on the state of the recovery. Friday’s CPI numbers look at consumer inflation, expected to stay tame. With prices in check, Friday’s July Retail Sales reports are expected to rebound from June, showing the consumer is indeed helping things along.

>> 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 August 9 – August 13

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months Virtually no economists think the Fed will touch rates at Tuesday’s meeting, nor for the next two confabs after that. We will all be carefully listening to the FOMC policy statement for any insight on what might quicken the pace of the recovery and add jobs. 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%

Probability of change from current policy: