Market Update

For the week of August 30, 2010 - Vol. 8, Issue 35

>> Market Update 

INFO THAT HITS US WHERE WE LIVE  You can't sugar-coat last week's housing reports, but they don't necessarily foretell a "double-dip" recession in real estate. July Existing Homes Sales were off 27.2%, at an annual rate of 3.83 million, well below the expected 4.65 million rate. The months' supply went from 8.9 to 12.5 and there was also a rise in inventories. The truth is, the expectation was a bit high. An annual rate below 4 million for July makes sense, given that the home buyer tax credit was slated to end in June.Getting an $8,000 check from the government certainly encouraged lots of people to move up their purchases. For the same reason, experts also predict weak August numbers, but after that, some feel existing home sales will start heading back to about 5.5 million units annually. For the year, inventories are down 2.0%, while the median price is UP 0.7%.

July New Home Sales were down 12.4% to a 276,000 annual rate, below the expected 330,000 pace. The months' supply went to 9.1, but inventories were unchanged at 210,000, their lowest level in decades. Part of the sales drop was because the now expired tax credit required a signed contract by April 30. New homes sales are counted at contract and the April number hit 414,000. In the three months since then, sales are averaging only 291,000 annually. New home buyers may also be going for recently built homes, now at attractive prices. New homes, typically about 15% of sales, are now around 7%!

The Mortgage Bankers Association's weekly survey showed purchase loan applications UP 1% from the week before, refinance applications UP 6%, and mortgage rates at record low levels. 

>> Review of Last Week

THANK YOU, BEN... Ben, of course, is Chairman Bernanke, head of the Federal Reserve. Friday he said the Fed has no triggers set for further easing of monetary policy and he sees continued economic growth. These comments at a central bank summit in Jackson Hole, Wyoming, were all the Wall Street bulls needed to hear to push stocks up Friday after a week of declines. The big rally wasn't quite big enough, though, as the three major indexes still ended down for the week just a tad.

There were other decent economic signs. The August Richmond Fed index of manufacturing in the mid-Atlantic region was +11, down from July's +16, but higher than expected and showing that the factory sector still continues its strong growth. Durable Goods orders were UP 0.3% for July, but disappointed because 3.0% was forecast. Nonetheless, Durable Goods are UP 9.3% over a year ago. Initial unemployment claims dropped by 31,000 to 473,000 for the week, a nice sign after last week's surge. Continuing claims also fell, by 62,000 to 4.46 million.

Friday featured two big news items. First, Q2 GDP was revised lower, from 2.4% to 1.6% growth, but this was measurably better than what many economists had expected and significant parts of the report showed improvement. Personal spending and business Investment were both revised UP, with domestic purchases UP 4.3%. Corporate profits continued their strong growth in Q2, UP at a 20% annual rate and UP 39% over a year ago. Then we had Chairman Bernanke reassuring investors he expects growth to pick up in 2011 and the Fed is ready to use "unconventional measures if it proves necessary." Again, thank you, Ben!

For the week, the Dow ended down 0.6%, to 10150.65; the S&P 500 was down 0.7%, to 1064.59; and the Nasdaq was down 1.2%, to 2153.63.

Bonds had a bit of a rocky week, ending with investors heading back into stocks on Friday, willing to take on more risk after listening to Bernanke. The FNMA 30-year 4.0% bond we watch still ended UP 5 basis points for the week, closing at $102.20. Freddie Mac's survey showed national average fixed rates for conforming mortgages at historically low levels for yet another week. 

>> This Week's Forecast

INCOME, JOBS, INFLATION, JOBS, MANUFACTURING, JOBS, HOME SALES, JOBS...There will be important economic reports to ponder, but rest assured, everyone will have Friday's August Jobs Report on their minds the whole week. Experts project a smaller loss of payrolls than the prior month, with the jobless rate about the same. Leading up to the biggie, Monday features July Personal Income, forecast up, and July PCE readings, which should show inflation remaining pretty much in check. Tuesday's Consumer Confidence is projected up a little, but manufacturing is predicted down a tad, as measured by Tuesday's Chicago PMI and Wednesday's ISM Index. Tuesday afternoon we'll have the minutes from the Fed's August 10 meeting and see if they add any insight to Bernanke's comments last Friday.

>> 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 August 30 - September 3

>> Federal Reserve Watch   

Forecasting Federal Reserve policy changes in coming months  With concerns about the economic recovery continuing, virtually all the experts believe the Fed will keep rates low for an "extended period," well into next 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: