>> Market Update INFO THAT HITS US WHERE WE LIVE... Last week was packed with housing market data and the news does keep getting better even though the media hasn't caught on quite yet. Wednesday saw December New Home Sales UP 17.5%, blowing away forecasts with a 329,000 annual rate. The supply of new homes dropped to 6.9 months and the new homes inventory slid to 190,000, down 66.8% from its 2006 peak and at the lowest level since 1968. More good news came with an 8.5% boost in the median home price versus a year ago, to $241,500, its highest level since April 2008. The average home price registered a 4.7% gain compared to a year ago.
Speaking of prices, the Case-Shiller home price index for the 20 largest metro areas was down 0.5% in November, better than expected. Although prices are off 1.6% in the past year, they're still up 1.2% from the low they hit in May 2009. Inspired by the November slip, pundits fretted about a possible "double dip" in housing prices. But a chart of the Case-Shiller index for the 10 largest metro areas shows the trend in prices, adjusted for inflation, is essentially flat, perhaps rising a bit, since early last year. And the nominal value of the index is almost 5% ABOVE its April 2009 low. A rational mind might conclude housing prices have finally bottomed, 5 years after hitting their peak.
Buyers are supporting this notion, sending Pending Home Sales, tracking contracts signed on existing homes, UP 2.0% in December. This report has now had three strong months in a row, so existing homes sales, tracking actual closings, should stay on the increase in January. >> Review of Last WeekLET'S NOT GET CARRIED AWAY... Just as we were all set to celebrate an eight-week winning streak for the stock market, Friday treated us to the biggest one-day drop in months, with the Dow falling 166 points on fears over Egyptian unrest. As oil prices rose, investors seeking safety sold off their equity positions, but losses were modest in the end. All three major indexes were down for the week by half a percent or less.
The economic data keeps offering encouragement, but Wall Street always first looks to corporate earnings to gauge how we're doing. Last week saw 14 Dow components reporting Q4 numbers and 11 of them did better than expected. Some missed their revenue targets and issued lukewarm guidance going forward. But overall, the corporate earnings picture continues to show a preponderance of strong performances in spite of the slow rate of economic recovery.
Durable Goods Orders were down in December but this was almost all due to a drop in volatile civilian aircraft. Orders for "core" capital goods are actually UP two months in a row. Weekly initial jobless claims were up, but they included the prior week's claims that were delayed by snowstorms in the South. Housing showed the upbeat signs mentioned above. Best of all, the first estimate for Q4 GDP came in at a 3.2% annual growth rate. This was a little lower than expected, but exports were super strong and consumer spending was UP a very healthy 4.4% annually, its fastest rate in almost five years.
For the week, the Dow ended down 0.4%, at 11824; the S&P 500 was off 0.5%, to 1276; but the Nasdaq dropped just 0.1%, ending at 2687.
Bonds prices were helped by some well-received auctions Wednesday and Thursday, followed by the flight to safety on Friday, courtesy of falling stocks. The FNMA 4.0% bond we watch ended UP 78 basis points for the week, closing at $99.09. This bodes well for mortgage rates, although Freddie Mac's weekly survey of conforming mortgages reported average fixed-rate mortgage rates inching up slightly, thanks to the strengthening economy. Still, mortgage rates do remain at super low levels. >> This Week’s ForecastFOCUSING ON WHAT THE FED FOCUSES ON... The Fed has a dual mandate of controlling inflation and supporting job growth. What happens with the Fed Funds Rate depends on what's going on in those two areas, which bracket this week's economic news. Monday, we get the Fed's favorite inflation gauge, Core PCE Prices, expected to stay well under control. Friday's January Employment Report is forecast to add 150,000 jobs, which is all to the good, but not enough to prevent the unemployment rate from edging up a tad as the workforce grows.
Other key economic indicators include Monday's Chicago PMI take on Midwest manufacturing, Tuesday's ISM manufacturing index and Thursday's ISM services index. All are expected to continue to show expansion, with readings over 50. >> The Week’s Economic Indicator CalendarWeaker 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 January 31 – February 4 Date | Time (ET) | Release | For | Consensus | Prior | Impact | M
Jan 31 | 08:30 | Personal Income | Dec | 0.5% | 0.3% | Moderate | M
Jan 31 | 08:30 | Personal Spending | Dec | 0.6% | 0.4% | HIGH | M
Jan 31 | 08:30 | PCE Prices - Core | Dec | 0.1% | 0.1% | HIGH | M
Jan 31 | 09:45 | Chicago PMI | Jan | 65.0 | 66.8 | HIGH | Tu
Feb 1 | 10:00 | ISM Index | Jan | 58.2 | 58.5 | HIGH | W
Feb 2 | 10:30 | Crude Inventories | 1/29 | NA | 4.84M | Moderate | Th
Feb 3 | 08:30 | Initial Unemployment Claims | 1/29 | 425K | 454K | Moderate | Th
Feb 3 | 08:30 | Continuing Unemployment Claims | 1/29 | 3.925M | 3.991M | Moderate | Th
Feb 3 | 08:30 | Productivity-Prelim. | Q4 | 2.2% | 2.3% | Moderate | Th
Feb 3 | 10:00 | ISM Services Index | Jan | 57.0 | 57.1 | Moderate | F
Feb 4 | 08:30 | Average Workweek | Jan | 34.3 | 34.3 | HIGH | F
Feb 4 | 08:30 | Hourly Earnings | Jan | 0.2% | 0.1% | HIGH | F
Feb 4 | 08:30 | Nonfarm Payrolls | Jan | 150K | 103K | HIGH | F
Feb 4 | 08:30 | Unemployment Rate | Jan | 9.6% | 9.4% | HIGH |
>> Federal Reserve Watch Forecasting Federal Reserve policy changes in coming months The Fed's statement coming out of last week's meeting continued to tout their view that the Funds Rate needs to stay at its rock bottom level until the recovery picks up considerably. This week's economic reports shouldn't inspire the Fed to hike the Rate any time soon. 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% After FOMC meeting on: | Consensus | Mar 15 | 0%–0.25% | Apr 27 | 0%–0.25% | Jun 22 | 0%–0.25% |
Probability of change from current policy:
After FOMC meeting on: | Consensus | Mar 15 | <1% | Apr 27 | <1% | Jun 22 | <1% |
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