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: