I INFO THAT HITS US WHERE WE LIVE Mortgage rates have been dropping since the Fed announced it would buy $600B worth of mortgage backed securities and debt issued by Fannie Mae, Freddie Mac and Ginnie Mae. In this environment, mortgage applications last week were up 112% over the previous week. That shows the effect lower rates can have. It's estimated that each 1% decline in mortgage rates roughly amounts to a 10% increase in homebuyer purchasing power. This can generate an estimated 500,000 more home sales.
Apparently the Treasury Department knows this too, since last week it announced a plan to boost home sales by dramatically lowering interest rates on loans for home purchases. Treasury would temporarily use the clout of Fannie Mae and Freddie Mac to encourage banks to make home loans at rates as low as 4.5%. This is more than a full point lower than the best rates out there for standard 30-year fixed-rate mortgages. These very low rates would do a lot to increase buyer activity, stop the slide in home prices and get the economy back on track.
The present home market is already a very opportune place for first-time buyers and real estate investors, who know we're seeing unprecedented value in many attractive neighborhoods. In fact, investors bought 40% of all homes sold in October, about the same percentage as September.
>> Review of Last Week
REMEMBER THE THANKSGIVING WEEK RALLY?... Well, it's nice if you still do, because the stock market forgot all about it. We went into the week with a five-session winning streak, which was abruptly put to an end with an 8.9% drop on Monday. Investors were hit with both an ISM Index that showed weaker manufacturing activity and an official recession declaration finally coming from the National Bureau of Economic Research (NBER). Their surprising (to us) statement put the start of the recession in December of 2007, as opposed to Q3 of 2008, which was the first quarter of declining GDP. The NEBR, a group of academic economists, is the official arbiter of US business cycles. So I guess we have to live with their pronouncement, which ignores the expansion in GDP for the first two quarters of 2008, including Q2's very healthy 2.8% growth rate!
Anyway, this down view of things continued with weak November auto sales and an ISM Services index that was just as bad as the manufacturing one. Blackberry company Research In Motion, Merck and DuPont all gave cautious outlooks. The week ended with a disappointing, though expected, Employment Report showing unemployment inching up to 6.7%.
But hold on, folks. Let's check out Thanksgiving weekend retail sales. One source affirmed total sales beat last year's. Another reported the average amount spent was UP 7.2%. This was followed by Cyber Monday with online retail spending UP 15% over last year. In other news, GE said its dividend was safe and the Bank of England and the European Central Bank made sharp cuts to their key lending rates. Finally, initial unemployment claims fell for the second week running, after peaking three weeks ago.
Friday saw a 259-point rally, but the Dow was still down 2.2% for the week, closing at 8635.42. The S&P 500, down 2.3%, went to 876.07. The NASDAQ, down just 1.7%, ended at 1509.31.
Over in the bond market, the action was interesting. Last week, Chairman Ben Bernanke observed that the Fed is running out of room to cut rates, now at 1.00%. But he said they could take the path of buying large amounts of long-term Treasuries to drive rates down. This inspired a run on Treasuries that saw the yield on the benchmark 10-year Treasury go to 2.505%, its lowest level in over 50 years. It ended the week at a still super low 2.680%. Mortgage rates, which have already been dropping nicely, should continue headed in a very favorable direction.
>> This Week's Forecast
THE BEAT GOES ON... This week we'll have more key info on both the economy and business. Economically, pending home sales will occupy our focus, as well as the Producer Price Index and retail sales.
On the corporate front, Kroger and Costco will report quarterly results. On Monday, we'll have November sales from McDonald's, a Q4 update from Texas Instruments and a fiscal 2009 outlook from 3M. Biggest interest will be around the auto industry bailout. Experts believe Congress will do something, but no one knows what they'll require the Big Three to do in return.
>> 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 Dec 8 - Dec 12
|10:00||Pending Home Sales||Oct||-2.3%||-4.6%||Moderate|
|08:30||Initial Jobless Claims||12/06||NA||509K||Moderate|
|08:30||Producer Price Index (PPI)||Nov||-1.8%||-2.8%||Moderate|
|08:30||Retail Sales ex-auto||Nov||-1.7%||-2.2%||HIGH|
|10:00||U of Mich Consumer Sent-Prelim||Dec||58.0||55.3||Moderate|
>> Federal Reserve Watch
Forecasting Federal Reserve policy changes in coming months.
Even though Chairman Bernanke talked last week about options beyond rate cutting, a growing number of experts see the Fed making another rate chop at their December 16 meeting. The big expectation is for a 25 basis point (0.25%) cut to help push the economy back on track. Current Fed Funds Rate: 1.00%
|After FOMC meeting on:||Consensus|
Odds of change from current policy:
|After FOMC meeting on:||Consensus|