For the week of May 24, 2010 – Vol. 8, Issue 21

INFO THAT HITS US WHERE WE LIVE Last Tuesday April Housing Starts were UP 5.8% at an annual rate of 672,000 units. This puts them UP 40.9% over a year ago, with single-family starts UP 10.2% for the month. April New Building Permits were off 11.5%, at an annual rate of 606,000. Some said these stats reflect builders’ response to the expiration of the homebuyer tax credit. Nevertheless, housing has turned the corner….

Single-family starts are up four months in a row, UP 53.6% vs. a year ago. For the first time since 2005, single-family homes under construction are up four months in a row. And even though they slipped in April, building permits are UP 16% over a year ago. No wonder the home builders confidence index hit a 33-month high in May.

Home prices will also begin to rebound by next year, as reported in a survey of 92 housing analysts and economists from MacroMarkets LLC. These experts see home prices, as measured by the S&P/Case-Shiller national index, going up on average about 12% by the end of 2014. Some forecasters put prices up as much as 37%. These analysts aren’t worried about growing inventories. They point out that a lot of excess supply is in regions that are economically depressed or out-of-the-way. This isn’t really a factor with most potential buyers who will bid up prices in more popular areas.

>> Review of Last Week

UNCERTAINTY UNCORKS VOLATILITY… Investor uncertainties made for a very volatile stock market last week, as major indexes fell to 10% below their last peak. This is called a correction… unless it keeps going another 10%, in which case it’s a bear market. Fears were fueled by worries over European debt, new financial regs and the strength of our own recovery. Experts maintain Europe will take time to heal. Unfortunately, patience is in short supply on Wall Street. But there’s now a trillion dollars available to get Europe back on track, new financial regs are not yet law and, as far as the state of the U.S. economy, judge for yourself…

Manufacturing continues to rebound, though New York’s Empire State Index slipped a little, to +19.1 for May. That’s still accelerating growth, just not as fast as the month before. Last week’s data showing the housing market has turned the corner is covered above. Inflation worriers should be calmed by the –0.1% drop in April’s PPI reading on wholesale inflation. Those who feel consumer inflation is more important should have been happy to see the –0.1% drop in the CPI.

Then we had more Q1 corporate earnings. Of 26 S&P companies reporting last week, 25 beat Earnings Per Share expectations. These included Wal-Mart, Home Depot, Lowe’s, Target, TJX, Staples and GAP in the all-important retail sector that measures consumer participation in the recovery. Over in tech land, Hewlett-Packard and DELL had nice gains in both profits and revenues.

Nonetheless, for the week, the Dow ended down 4.0%, to 10193.39; the S&P 500 was down 4.2%, to 1087.69 and the Nasdaq was down 5.0%, to 2229.04.

With stocks showing downward volatility, safety buying was driving up bonds. But things didn’t get too crazy, given the big supply coming on the market this week. The FNMA 30-year 4.5% bond we watch closed UP 57 basis points for the week, ending at $102.16. Freddie Mac’s weekly survey showed national average mortgage rates dropping again, with some hitting their lowest levels in years.

>> This Week’s Forecast

HOME SALES, INFLATION, THE ECONOMY… This week’s economic reports cover three topics dear to our hearts. April Existing Home Sales on Monday will be followed by New Home Sales on Wednesday. The expectation is for continued increases as housing recovers. Friday’s PCE will give us the Fed’s favorite inflation reading. Other inflation gauges have been tame, so nothing dramatic is expected. Finally, another look at the Q1 GDP measure of the overall state of our economy. This second estimate may be revised up a tad, which would be another good sign.

>> 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 24 – May 28

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months Many economists now feel the Fed will continue to hold interest rates at current levels through the end of the year. Of course, inflation must remain in check, but so far that’s not been a problem. 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: