Austin Mortgage Blog

For the week of July 26, 2010 – Vol. 8, Issue 30

INFO THAT HITS US WHERE WE LIVE Tuesday, June Housing Starts came in down 5.0% from May to a 549,000 annual rate. This was below expectations, but still up 15.1% from the low they hit in April 2009. Most of the drop came from volatile multi-family starts. Single-family starts were down a mere 0.7%. Most significantly, housing completions shot up 26.2% in June, the biggest monthly gain going back to the late 1960′s. Builders clearly shifted focus from starting to finishing, as they pushed to close sales qualifying for the homebuyer tax credit. Finally, Building Permits were UP 2.1% for June, beating expectations, so things are looking up for the months ahead.

Thursday saw June Existing Home Sales down 5.1% to an annual rate of 5.37 million. But this beat expectations for the fourth time in five months and was 9.8% above sales a year ago. The median price for an existing home also gained in June, coming in at $183,700. This is up 1.0% from last year. In addition, the FHFA price index for homes financed by conforming mortgages went up 0.5% in May, increasing for the third month in a row.

National average rates for fixed rate Austin mortgages hit new lows, according to Freddie Mac’s weekly survey of conforming loans. So refinance applications shot up 7.6% over the week before, but best of all, purchase loan applications were also up a healthy 3.4%.

>> Review of Last Week

UP WE GO… It was another interesting week on Wall Street, with stocks briefly headed in the wrong direction before ending the week decidedly UP. The fact was, the good economic news simply outweighed any disappointments by a lot. The net result for the stock markets left all major indexes resoundingly UP for the week…from 3% to 4%!

Topping the disappointments were Fed Chairman Ben Bernanke’s comments before Congress that the U.S. economic outlook is “unusually uncertain.” This allowed him to add that the Fed stands ready to take additional action, if necessary, to either do more boosting or halt inflation. OK, but right now there’s plenty of evidence the world’s largest economy is recovering just fine, if at a slightly slower rate than before. Earnings from IBM and Amazon.com also disappointed, but overall there were pretty slim pickings for the bears.

There actually was a big batch of strong earnings. Of the 150 S&P500 companies who have reported Q2 results, 85% of them beat earnings estimates by an average of 7%. General Electric raised its quarterly dividend 20%, the first increase since it historically cut its dividend over a year ago. Even the media is beginning to admit companies appear to be doing well. Then Friday we got the long-awaited results of the European bank stress tests, which came out better than expected. There was some grousing over how stressful the tests truly were, even though the Committee of European Banking Supervisors hadn’t seemed too soft before.

For the week, the Dow ended UP 3.2%, to 10424.62; the S&P 500 was UP 3.5%, to 1102.66; and the Nasdaq was UP 4.1%, to 2269.47.

Good news for the European banks and the stock market wasn’t so good for the bond market. Investors stopped chasing safety plays, so bond prices suffered. The FNMA 30-year 4.0% bond we follow fell 16 basis points for the week, ending at $101.75. But, as reported above, national average rates for conforming mortgages remain at record low levels.

>> This Week’s Forecast

FROM NEW HOMES TO Q2 GDP… This week takes us on an economic trip across topics that range from Monday’s June New Home Sales (expected to rise a bit) to Friday’s Advanced Q2 GDP, likely to settle on moderate growth just shy of 3%. In between, Wednesday’s Durable Goods Orders should be up, showing business continues to recover. We’ll also watch Tuesday’s Consumer Confidence and Friday’s Michigan Consumer Sentiment. These are forecast to dip just a little.

Q2 corporate earnings reports continue, including BP, Boeing, Exxon Mobil, Sony, and Visa.

>> 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 July 26 – July 30

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months Since Fed Chairman Bernanke still finds things “uncertain,” economists are more certain than ever the Fed will keep rates at super-low levels for the rest of the year. 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:

For the week of July 19, 2010 – Vol. 8, Issue 29

INFO THAT HITS US WHERE WE LIVE Some analysts feel the homebuyer tax credits artificially boosted the housing market by pushing forward home sales that would have happened later. Others feel most buyers would have bought anyway. In any case, there’s now concern about a coming drop in sales. Well, June sales figures should still benefit from activity spurred on by the tax credits. And tax credit sales should even help monthly reports through September, now that buyers in contract on April 30 have been given until September 30 to close.

Nonetheless, we ought to keep an eye on monthly Pending Home Sales, which track signed contracts that turn into sales a few months out. Even though we may have a sales dip after the tax credit, the fact remains that near historic low mortgage interest rates are getting people back into the market. These rates, combined with today’s prices, have made homes more affordable than they’ve been in years, letting many buyers move up to better neighborhoods with more choices.

But buyers shouldn’t wait. The National Association of Realtors chief economist sees the median home price rising nationally 2% to 3% this year. The NAR’s CEO feels sales will pick up in the fall and that the down-cycle has run its course. The chief economist at Moody’s Economy.com also believes the housing crash is nearly over. And we all know Austin mortgage rates won’t stay at their current levels indefinitely. In other words, this could be one of the best times to buy a home in decades.

>> Review of Last Week

UP AND DOWN… The stock market indexes were up nicely through Wednesday, continuing last week’s rally, then slipped slightly on Thursday before plunging more than 261 points Friday. For the week, the declines hovered around 1%, not too bad considering the volatile atmosphere of the proceedings on Wall Street.

The problems Friday centered on a drop in the University of Michigan Consumer Sentiment number and soft top-line Q2 revenues from Bank of America, Citigroup, and GE, even though bottom-line earnings from these behemoths beat expectations. The big disappointment came from Google, which missed earnings estimates even though revenue grew a faster than expected 25% for the quarter. But Google was the ONLY major company reporting last week that did not BEAT earnings forecasts.

We also heard complaints about some of the economic data. The trade deficit increased in May, but exports are UP 21.0% in the past year. Yes, May retail sales were off half a percent, but the annual growth rate for retail in the last nine months remains a respectable 6.7%. The Producer Price Index (PPI) and Consumer Price Index (CPI) showed wholesale and consumer inflation down a tad in June. This got analysts fretting about deflation, but both PPI and CPI are actually up from a year ago.

Nonetheless, negative feelings prevailed, so for the week, the Dow ended down 1.0%, to 10097.90; the S&P 500 was down 1.2%, to 1064.88; and the Nasdaq was down 0.8%, to 2179.05.

As stocks slid, the bond market attracted a slew of investors on the proverbial flight to safety. Prices headed north, as the FNMA 30-year 4.0% bond we follow cruised UP 41 basis points for the week, ending at $101.91. Freddie Mac’s weekly survey reported that national average rates for conforming mortgages remain at record low levels.

>> This Week’s Forecast

BACK TO HOUSING… Last week’s tsunami of economic data lacked any info on the housing market. This week’s reports make up for that, beginning with June Housing Starts and Building Permits on Tuesday. Starts are expected to be down slightly, with permits virtually flat. Thursday we’ll see June Existing Home Sales, which may be down a bit. We’ll also look at the Leading Economic Indicators (LEI) Index, which could be a tad off for the month.

Q2 corporate earnings reports continue, including: Amazon.com, AT&T, Caterpillar, Coca-Cola, Goldman Sachs, IBM, PepsiCo, and Texas Instruments.

>> 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 July 19 – July 23

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months According to just about every economist out there, the Fed will probably keep rates at super-low levels for the rest of the year, as inflation is expected to remain benign during that time. 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:

For the week of July 12, 2010 – Vol. 8, Issue 28

INFO THAT HITS US WHERE WE LIVE Last week’s Inside Lending reported that on Friday, the President signed into law a bill that extends to September 30 the closing deadline for claiming the federal homebuyer tax credit. We want to add he signed a second bill that retroactively reinstates the National Flood Insurance program, which expired May 31, until September 30. This news is important for home buyers who are shopping in areas where flood insurance is necessary to get a mortgage. It would obviously behoove these buyers to close before September 30.

National average mortgage rates hit new lows again last week, as reported in Freddie Mac’s weekly Primary Mortgage Market Survey. However, the Mortgage Bankers Association revealed that it was refinancing homeowners who were principally taking advantage of these rates, making up the lion’s share of last week’s loan applications. Incidentally, with these heightened levels of refi activity, the effective rate of all outstanding mortgages was just under 6% in the first quarter of 2010, the lowest on record since 1977.

>> Review of Last Week

DOUBLE DIP DOUBLE TALK… Lately it’s been hard to ignore all the talk about threats of a “double-dip” recession. So last week it was refreshing to see The Wall Street Journal identify all this talk as “exaggerated fears of a double-dip recession.” They pointed out: “Growth may be slowing from its first-quarter peak…but most indicators point to continued global growth.” Investors quickly came to their senses, stopping the recent stock market slide and sending all major indexes up for the week by 5% and more!

There certainly was adequate support for a more positive economic outlook. The “continued global growth” the Journal mentioned was backed by the latest forecast from the International Monetary Fund. The IMF increased its estimate of 2010 GDP growth from 4.2% to 4.6%. Some fretted that the ISM Services Index dropped a tad from its May reading. But levels above 50 signal expansion, so June’s 53.8 shows our non-manufacturing sectors are still experiencing healthy economic growth.

Initial jobless claims came in better than expected for the week, dropping by 21,000. Retailers reported June same store sales, which weren’t the debacle some had predicted, with Macy’s and Nordstrom actually coming in with some pretty good numbers. Finally, the Q2 corporate earnings season begins this week and first estimates are that profits will be up 34% overall vs. last year. Does any of this sound like a dip to you?

For the week, the Dow ended UP 5.3%, to 10198.03; the S&P 500 was UP 5.4%, to 1077.96; and the Nasdaq was UP 5.0%, to 2196.45.

With stocks rallying, the bond market didn’t have such a great time of it. Nonetheless, the FNMA 30-year 4.0% bond we follow was actually UP 22 basis points for the week, ending at $101.50. As noted above, national average mortgage rates tracked by Freddie Mac’s weekly survey reached record low levels.

>> This Week’s Forecast

A DEEP LOOK INTO THE ECONOMY… Economically speaking, this week promises to tell all, except for the housing market. Tuesday’s May Trade Balance should stay pretty even, still showing nice export activity. Wednesday’s June Retail Sales are forecast to improve on May’s readings, a good indication of consumer health. We’ll also see if the Minutes of the FOMC Meeting on June 23 reveal anything new about the Fed’s economic outlook.

Inflation should remain benign as tracked by the Thursday’s wholesale PPI and Friday’s consumer CPI. Thursday will also be a big day for manufacturing, expected to stay in recovery mode as measured by the Empire and Philadelphia Fed Indexes, plus Industrial Production and Capacity Utilization. Q2 earnings will come from Alcoa, Intel, JPMorgan Chase, Bank of America, Citigroup, and GE.

>> 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 July 12 – July 16

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months Economists are still virtually unanimous in forecasting the Fed will keep rates at present super-low levels through the FOMC meeting in November. 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:

For the week of July 5, 2010 – Vol. 8, Issue 27

INFO THAT HITS US WHERE WE LIVE Last Thursday pending home sales, a measure of contracts signed for existing homes, were reported off 30% in May compared to the prior month. This of course was simply the result of the end of the homebuyer tax credit, which required a signed contract by April 30. Common sense tells us many of those April contracts would have happened in May or even later if it weren’t for the pressure to qualify for the tax credit.

More good news on the price front, as the Case-Shiller home price index was UP 0.4% in April, seasonally-adjusted, and up a comfortable 3.8% versus a year ago. Case-Shiller tracks home prices in the 20 largest metro areas. This follows the prior week’s FHFA home price index, which was UP 0.8%  for April for homes financed with conforming mortgages. Buyers take note.

Friday, the President signed into law a bill that extends the closing deadline for claiming the federal homebuyer tax credit to September 30. The National Association of Realtors estimated that up to 180,000 homebuyers in contract by April 30 could have missed the June 30 closing because of processing delays due to the huge volume of buyers seeking the tax credit.

>> Review of Last Week

OFF AGAIN… Investors were back in worry mode last week, still concerned about European debt and the speed (or lack thereof) of our own economic recovery. At the Group of Twenty meeting in Toronto, the financial leaders of the world’s largest economies didn’t say or do much to raise spirits on Wall Street. So stocks slid another week, as investors sold off their equity holdings and sought safer places to put their money.

The week began with May personal income UP 0.4% and personal spending UP 0.2%. For the last six months, personal income is UP 4.6% annually and spending UP 3.8% annually. Overall PCE (consumer inflation) was flat for May, up only 0.9% annually for the last six months. Thursday brought the pending home sales data covered above. This was followed by the ISM index showing manufacturing still grew strongly in June, though slightly below May’s reading.

Friday’s employment numbers showed a drop of 125,000 jobs for June but April/May revisions added 25,000, so the net loss was 100,000. Furthermore, as the President himself pointed out that morning, the report “…reflected the planned phase out of 225,000 temporary Census jobs, but it also showed the sixth straight month of job growth in the private sector. All told, our economy has created nearly 600,000 private sector jobs this year.” Finally, the unemployment rate, expected to edge up a tad, dropped from 9.7% in May to 9.5% for June.

For the week, the Dow ended down 4.5%, to 9686.48; the S&P 500 was down 5.0%, to 1022.58; and the Nasdaq was down 5.9%, to 2091.79.

Bond prices continue to benefit as economic nervousness about the slowness of the jobs part of our recovery has investors seeking the safe haven of bonds. The FNMA 30-year 4.0% bond we follow did well, UP 47 basis points for the week, ending at $101.28. National average rates on three of the four mortgage types tracked by Freddie Mac’s weekly survey reached record lows for the second week in a row.

>> This Week’s Forecast

QUIET AFTER THE HOLIDAY… The shortened post-4th-of-July week will allow us to quietly recover from the pyrotechnic celebrations without a lot of economic data to distract us. Tuesday’s ISM Services is expected to show the services part of our economy continuing to expand. Initial and Continuing Unemployment Claims figures will hold our interest after last week’s monthly Employment report, and they are expected to drop.

>> 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 July 5 – July 9

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months As we still lack strong indicators of a recovery in jobs, virtually all economists believe the Fed will keep rates low, probably through the end of the year. 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:

For the week of June 28, 2010 – Vol. 8, Issue 26

INFO THAT HITS US WHERE WE LIVE Last week May existing home sales came in UP 19.2% over a year ago. Nonetheless, after beating expectations three months in a row, monthly sales fell short of the gain expected, off 2.2%. But the months’ supply of existing homes dropped from 8.4 to 8.3 months, as inventory slid to 3.89 million homes. And the median price is rebounding, UP 2.7% over last year. Finally, the April FHFA home price index was UP 0.8% for homes financed with conforming mortgages.

May existing home sales came off as disappointing because experts predicted a sales gain after the homebuyer tax credit ended. We saw spikes in February, March and April in pending home sales, which track signed contracts. Clearly many of these have not yet closed so they can be counted as sales. Analysts now expect these gains to show up in June. There’s no question the tax credit encouraged people to buy earlier than they would have. But, overall, home prices, Austin mortgage rates and inventory declines continue to be encouraging signs in the U.S. housing market.

May new home sales fared worse, dropping 32.7%, to a 300,000 annual rate. This was also seen as fallout from the end of the homebuyer tax credit. But April’s 446,000 annual rate indicates the real trend is probably in between, around 375,000, which some analysts feel is enough for builders to move the homes they’re starting. Builders can also take consolation in the fact that the new homes inventory is at 213,000, its lowest level in forty years.

>> Review of Last Week

ONE OUT OF THREE… Stocks suffered their first off week in three, mostly because investors chose to fret over economic data, Fed speak that didn’t meet their expectations and new banking regulations coming out of Washington. In the end, the financial legislation that got through Congress was less harsh than anticipated, which lifted bank stocks and the whole tone of Friday’s trading session, although all three stock market indexes ended down for the week.

But on the economic front, investors wouldn’t budge from their worries. May’s existing and new home sales didn’t meet forecasts, so the positive data in those reports was ignored. Similarly, after the FOMC meeting, Wall Street focused on the changes to the Fed’s policy statement that sounded less upbeat. Example: the economic recovery is now “proceeding” instead of “continued to strengthen.” Investors skipped over the good news the Fed will continue to keep the funds rate at 0%–0.25% for an “extended period.”

And there was other good news. The mid-Atlantic region’s Richmond Fed index was +23 for June, showing rapid growth in manufacturing. Shipments of core capital goods are UP 16.5% annually in the last three months, one of the biggest gains in 20 years! And capital goods orders are ahead of shipments for the third month in a row. Finally, real Q1 GDP was revised down to 2.7% annual growth, but this is still a very good number in light of the economically damaging record East Coast snow storms. Q1 corporate profits were UP 36% annually, which should spike both investment and payrolls going forward.

For the week, the Dow ended down 2.9%, to 10143.81; the S&P 500 was down 3.7%, to 1076.76; and the Nasdaq was also down 3.7%, to 2223.48.

Some of the week’s economic data certainly helped bonds, as did the sliding stocks that sent investors scurrying for safe havens to park their money. This benefited bond prices, so the FNMA 30-year 4.0% bond we now follow did well, UP nicely for the week, ending at $100.81. It’s no surprise that Freddie Mac’s weekly survey reported national average mortgage rates holding near record low levels.

>> This Week’s Forecast

INFLATION, PENDING HOME SALES, JOBS… We’ll have the important PCE inflation reading today, which is expected to remain benign. The week also features the Chicago PMI and the ISM Manufacturing Index, which should continue to show recovery in manufacturing. Thursday gives us May Pending Home Sales, which are expected to decline after the end of the homebuyer tax credit. The big news will be Friday’s June Employment Report. Experts see some job losses after last month’s gains, but the unemployment rate should remain under 10%. We’ll then have our long holiday weekend — Happy Fourth of July!

>> 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 June 28 – July 2

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months The Fed made it clear last week they will most likely keep rates low for the remainder of the year. Most economists believe that will be the case. 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:

For the week of June 21, 2010 – Vol. 8, Issue 25

INFO THAT HITS US WHERE WE LIVE The big news of the week revealed housing starts down 10.0% in May to an annual rate of 593,000 units. Closer inspection of the report reveals that all the drop came from the South. In fact, housing starts were actually UP in all other regions of the country. The South suffered in May with the Gulf oil spill disaster and major flooding. It’s understandable that these unfortunate occurrences would make everyone, including home builders, more risk averse than usual. In any case, starts are UP 24.3% above their low a year ago April, with single-family starts UP 15.3% in the last year.

A little more worrisome was the 5.9% decline in building permits, which was seen nationwide. Of course, any slowdown in building will help speed up the reduction in new homes inventory. Nonetheless, permits are UP 4.4% overall and UP 3.1% for single-family units from a year ago.

Wednesday, Fannie Mae announced “Special Relief Measures” for borrowers whose properties or income are negatively impacted by the Gulf oil spill. Servicers may suspend or reduce these borrowers’ mortgage payments up to 90 days to determine the impact of the disaster on the property or the borrower’s financial condition. If you know someone who may qualify for this relief, please forward them this link: http://www.fanniemae.com/newsreleases/2010/5062.jhtml?p=Media&s=News+Releases

>> Review of Last Week

ONWARD AND UPWARD… Investors appeared to calm down a bit last week, responding more reasonably to the economic situation in Europe and sending stock prices up nicely. All three indexes are now back again in positive territory for the year. The big spike for stocks came Tuesday after European markets and the Euro rallied when Spain and Ireland did well with their debt offerings.

There were a few less than stellar economic reports during the week. The declines in housing starts and building permits for May were disappointing to many, although starts were not as worrisome as they first appeared, as reported above. Also, initial weekly unemployment claims were up by 12,000, while continuing claims edged up 88,000 after the prior week’s 234,000 decline.

But inflation appears under control. At the wholesale level, the Producer Price Index was down 0.3% for May, falling for the second month in a row. The more significant Consumer Price Index was also down, by an expected 0.2%. There was more evidence of strong recovery in the manufacturing sector, with industrial production UP 1.2% in May and UP 8.0% annually for the last six months. Capacity utilization moved up to 74.7% in May, rising 6.4% from last June, the fastest 11-month hike since 1983-84. Supporting these figures, the Empire State Index of manufacturing in the New York region went to 19.6 for June from 19.1 in May.

For the week, the Dow ended UP 2.3%, to 10450.64; the S&P 500 was UP 2.4%, to 1117.51; and the Nasdaq was UP 3.0%, to 2309.80.

Once again, even though stocks were up for the week, bond prices did well too. This can be put to inflation remaining under control and the slightly worse than expected weekly jobs numbers keeping investors uncertain. The gain in Mortgage Bond prices has us now following the FNMA 30-year 4.0% bond, which closed UP 32 basis points for the week, ending at $100.04. Freddie Mac’s weekly survey reported national average mortgage rates still at or near record low levels.

>> This Week’s Forecast

MONITORING MAY HOME SALES, THE FED AND Q1 GDP… This week’s data looks at May Existing Home Sales, expected to be up, and New Home Sales, forecast a trifle down. The big focus will be on the Fed meeting. Most economists don’t expect the rate to go up just yet, but the FOMC policy statement will be carefully scrutinized for indications of when that might happen. Friday will bring us the third estimate for Q1 GDP, which is expected to hold at 3% growth.  

>> 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 June 21 – June 25

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months Economists are now even more firmly convinced the current low-rate environment will continue a good 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:

For the week of June 14, 2010 – Vol. 8, Issue 24

INFO THAT HITS US WHERE WE LIVE The Mortgage Bankers Association reported demand for purchase mortgages was down 5.7% last week from the week before. Analysts felt the decline showed that the federal tax credits ending in April took away from future sales.

However, as reported in the April 19 INSIDE LENDING, those tax credits are still available to some service personnel. For members of the military, Foreign Service, and intelligence community who have been on official extended duty, the homebuyer tax credit was extended one full year — to April 30, 2011, for a signed contract and June 30, 2011, for the closing. If you have clients in these services, please have them contact us right away to see if they meet the specific provisions to qualify for this valuable benefit.

There are lots of other good reasons for housing to continue its recovery. Mortgage rates are at record low levels and economists report that relative to rents, national average home prices are about 10% below fair value and are at their lowest level relative to replacement cost in over thirty years.

>> Review of Last Week

BULLS PREVAIL… It was another super volatile week on Wall Street with the Dow down 115 points one day, up 123 points the next, then soaring 273 points a couple of days later. Ultimately, the bulls kept stock prices heading north and all three major indexes ended UP for the week. We finally got good economic news from across the seas, as Chinese exports grew 48.5% year over year, Australia’s unemployment rate dropped to 5.2%, and European debt worries subsided for the time being.

Wednesday the Fed reported in its regional economic review that the economy had strengthened in all twelve of its Districts for April and May. Testifying before Congress, Chairman Ben Bernanke said, “The private sector is beginning to take over this recovery.” He added, “The economy… appears to be on track to continue to expand through this year and next.” These are encouraging comments from this typically cautious man.

The jobs situation is of course still a concern, although new unemployment claims fell again last week and continuing claims dropped by 255,000 to 4.462 million, the lowest level so far in the recovery. Investors were concerned to see May retail sales down 1.2%. But the report also showed core retail sales, excluding autos, building materials, and gas, were up 0.1%. This bit of encouragement was bolstered by the University of Michigan Consumer Confidence Survey, up strongly from last month to a 75.5 reading.

For the week, the Dow ended UP 2.8%, to 10211.07; the S&P 500 was UP 2.5%, to 1091.60; and the Nasdaq was UP 1.1%, to 2243.60.

Stocks were positive for the week, but bond prices also held up thanks to the success of the week’s treasury auctions and Friday’s mixed consumer data driving flight-to-safety buyers to bonds. With the rise in Mortgage Bond prices, we are now following the FNMA 30-year 4.0% bond, which closed UP 12 basis points on Friday, ending at $99.72. Freddie Mac’s weekly survey showed national average mortgage rates holding at their historically low levels.

>> This Week’s Forecast

HOMES, INFLATION–UP OR DOWN?… We’re back to an action-packed week of economic data. Highlights include May Housing Starts and Building Permits on Wednesday, which should show us how builders feel now that the homebuyer tax credit has expired for all but some qualified service personnel mentioned above. Then wholesale inflation comes in with the PPI and Core PPI, followed by Thursday’s CPI and Core CPI, those all-important consumer inflation readings. Inflation is expected to remain at the benign levels that are holding down the Fed funds rate. The week is bookended with manufacturing reports, Monday for the New York region and Friday for the Philadelphia area.

>> 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 June 14 – June 18

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months Last week Chairman Ben Bernanke commented the Fed would probably raise rates before “unemployment is where we’d like it to be,” but most economists still feel we’ll be in a low-rate environment 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:

For the week of May 31, 2010 – Vol. 8, Issue 22

INFO THAT HITS US WHERE WE LIVE For the third month in a row, Existing Home Sales beat expectations, UP 7.6% for April and UP 22.8% over a year ago. A lot of the gain was put to the tax credit expiration that required a signed contract by April 30. But buyers have till June 30 to close, so observers feel sales will probably increase for the next couple of months, then take a short break before rising again. Inventories were up from 8.1 to 8.4 months, but this is similar to April gains in prior years, rather than evidence of some huge “shadow inventory” hitting the market. Meanwhile, the median price for an existing home went to $173,000, up 4.0% from a year ago.

April New Home Sales shot UP 14.8%, reaching a 504,000 annual rate, their highest level since May 2008. The supply fell to 5.0 months in March and inventories dropped to 211,000 — their lowest level since 1968, down 63.1% from their mid-2006 peak. The tax credit expiration also contributed to these great numbers. But the fact remains, new homes are now significantly more affordable, thanks to prices that are the lowest since 2003 and extremely low Austin mortgage interest rates.

Two home price indicators gave mixed signals. The Case-Shiller index for the 20 top metro areas was down 0.5% for March but UP 2.3% for the year. The FHFA price index for homes bought with conforming mortgages was UP 0.3% for the month but down 2.2% for the year.

>> Review of Last Week

THANK YOU, CHINA… Call it a somewhat volatile week in the stock markets, as investors continued to fret over Europe’s financial health, the Gulf oil spill and North Korea. Then Thursday China stepped in as a solid buyer of Eurozone bonds, giving Wall Street ample reason to calm down, leaving two major indexes up for the week, with the Dow off just 0.6%.

We continue to get good factory data, with the Richmond Fed manufacturing index at +26 for May indicating continued expansion in the Mid-Atlantic region. The Chicago PMI manufacturing index also showed growth, though slightly slower than the month before. Durable Goods were UP 2.9% for April and UP 18.9% over a year ago. Especially encouraging, orders for capital goods used in production were UP 7.4% for April and UP 30% over a year ago, one of the steepest annual boosts in the last 20 years.

Real Q1 GDP was revised down slightly to 3.0% annual growth. But Q1 corporate profits grew at a 24% annual rate and are UP 31% over a year ago. Economists expect these profits to boost hiring and business investments. Q1 prices were up only 1% annually, so inflation is still under control. April Personal Income came in UP 0.4% and Personal Consumption was flat, but economists feel it’s normal for consumers to take a break every few months. University of Michigan Consumer Sentiment was UP to 73.6.

For the week, the Dow ended down 0.6%, to 10136.63; but the S&P 500 was UP 0.2%, to 1089.41 and the Nasdaq was UP 1.3%, to 2257.04.

Bonds also had an up-and-down week, finally recovering on Friday to end in pretty good shape. The FNMA 30-year 4.5% bond we watch closed down 13 basis points for the week, ending at $102.03. National average mortgage rates continued near record lows, according to Freddie Mac’s weekly survey. Their Chief Economist feels this should soften the effect of the expiration of the homebuyer tax credit.

>> This Week’s Forecast

LOOKING FOR JOBS… The economic news of the week is dominated by the May employment report on Friday. Expectations are that a substantial number of jobs will be added, but increases in the workforce population will cut the unemployment rate by just 0.1%. On our way to this big news, we’ll be interested to check out April Pending Home Sales, which should continue to show gains. Tuesday’s ISM manufacturing read and Thursday’s ISM Services and revised Q1 Productivity should also provide more support for our continuing recovery. 

>> 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 31 – June 4

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months The sense among economists is becoming stronger that the Fed will hold interest rates at current levels through the end of the year, as inflation stays tame. 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:

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:

For the week of May 17, 2010 – Vol. 8, Issue 20

INFO THAT HITS US WHERE WE LIVE Last Tuesday the National Association of Realtors (NAR) reported the Q1 median price for existing homes was up in 91 out of 152 metro areas compared to a year ago, showing the housing market is starting to stabilize. This was a nice gain over Q4 of last year when prices were up in only about 40% of the cities tracked. Even more encouraging, the percentage price increases in 29 cities were in double-digits.

The NAR also reported that existing home sales of single-family homes and condos were UP 11.4% in Q1 compared to a year ago. Sales increased in 44 states and Washington, D.C., with over 70% reporting double-digit percentage gains.

Long-term forecasts were also revised slightly downward by the NAR, but the numbers are still good. They see existing home sales UP 4.3% this year and UP 5.1% for 2011, with the median resale home price UP 2.5% for 2010 and UP 3.7% in 2011. New single-family home sales are forecast to rise 6.9% in 2010 and a whopping 42.0% next year. Median new home prices will be up 3.3% this year and 4.7% the next.

>> Review of Last Week

ANOTHER EUROPEAN TRIP… Europe’s fiscal shenanigans were in the news again and they took the markets on a trip north, then turned them sharply south to end the week. The gains came after Sunday’s announcement of a major Euro-zone rescue package. But as the week wore on, concerns over whether individual countries would put the necessary austerity measures in place sent stocks down, though the market indexes ended the week with strong gains.

If you could take your mind off Europe, there were plenty of reasons to feel positive about the U.S. economic situation. Wednesday, the March trade deficit came in as expected, up $1.0 billion to $40.4 billion, thanks to the strength of our recovery pushing imports up faster than exports. Best of all, the report showed our total volume of international trade was up 3.1% for the month and up 24% since it hit bottom a year ago April.

On the jobs front, the four-week moving average inched down for both initial and continuing unemployment claims. Then Friday came the news retail sales were UP 0.4% for April and UP 0.9% including upward revisions to February/March. For the last six months, retail sales are up at a 10.7% annual rate, 10.3% excluding autos, showing the consumer is certainly alive and well. Finally, industrial production was UP 0.8% for April, as manufacturing continues to boom, up at a 9.5% annual rate since its low last June.

For the week, the Dow ended UP 2.3%, to 10620.16; the S&P 500 was UP 2.2%, to 1135.68; and the Nasdaq was UP.6%, to 2346.85.

Worried about Europe, investors flocked to the safety and bargains they found in bonds. Friday’s drop in stocks pushed bond prices up nicely. So even though we had good economic data on Friday, the week ended on an up note. The FNMA 30-year 4.5% bond we watch closed UP 9 basis points for the week, ending at $101.59. According to Freddie Mac’s weekly survey, national average fixed-rate mortgages dipped to their lowest levels of the year.

>> This Week’s Forecast

HOMES, INFLATION–WHAT’S GOING UP?… Housing Starts and Building Permits reports will tell us where new home construction is headed and the expectation is those numbers will continue to trend upward.  We’ll see if inflation is going up too, with the wholesale PPI on Tuesday, followed by consumer CPI inflation on Wednesday. Most experts feel inflation remains under control. The week will be bookended with reads on New York and Philadelphia manufacturing, which should continue to show a strong recovery for the sector.

>> 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 17 – May 21

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months Economists are now moving back to the idea the Fed will indeed keep rates where they are for an “extended period” as long as inflation remains in check. 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: