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: