For the week of May 10, 2010 – Vol. 8, Issue 19

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.

Economic Calendar for the Week of May 10 – May 14

>> 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.

Current Fed Funds Rate: 0%–0.25%

Probability of change from current policy: