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: