Monday, August 02, 2010
by The Silveria Team - Frank Silveria III
>> Market Update
INFO THAT HITS US WHERE WE LIVE Last week began nicely with June New Home Sales UP 23.6% to an annual rate of 330,000, well ahead of expectations. This was a sharp rebound from May when New Home Sales sank to record lows not seen since 1963. This volatility of course is all about the homebuyer tax credit (requiring a contract by April 30 and a closing by June 30, now extended to September 30). Consequently, new homes sold at a 422,000 pace in April, fell to a 267,000 pace in May, then went to 330,000 in June.
Demographic trends say sales should continue to rebound, as we eventually need to sell new homes at a 950,000 annual rate to meet population growth and replace teardowns. The supply of unsold new homes is now down to 7.6 months, just above the ideal 6-month level. Actual inventories are down to 210,000, their lowest level since 1968, when there were 35% fewer people around.
We also saw that home prices rose 4.6% in May, year-over-year, as tracked by the Standard & Poor's/Case-Shiller National Home Price Indices. The 20-city index was UP 1.3% over the prior month, with 19 of the 20 metros showing gains during that period.
>> Review of Last Week
A HOT MONTH, JULY... The trading month on Wall Street ended Friday with the markets really heated up for July. The Dow Jones Industrial Average was UP 7.1% for the month, while the broadly based S&P 500 finished UP 6.9%. This was the first positive month for U.S. stocks since April. May and June had investors worrying over China's attempts to slow its growth and a European debt crisis which still hasn't had much impact in the U.S.
The week had a few negatives to please the bears. For example, the Conference Board's Consumer Confidence Index went to 50.4 in July, its second monthly decline. Yes, consumers are concerned about jobs and the pace of recovery, but the fact is, the economy is growing and businesses are making profits, which they will ultimately invest in more jobs. Gloomy types also jumped on the 1.0% drop in Durable Goods for June, yet "core" capital goods (take out defense and volatile aircraft shipments) were UP 0.2% -- their ninth gain in the past ten months!
But the biggest encouragement came from strong second-quarter corporate earnings. With about two-thirds of the S&P500 companies reporting, Thomson Reuters says Q2 operating earnings are on their way to a 36% gain, with revenues UP 9% compared to a year ago. Friday, advanced Q2 GDP came in with real GDP expanding 2.4% annually, UP 3.2% in the last year. So much for the "double-dip" recession. The week ended with the Chicago PMI registering another monthly increase for Midwest manufacturing and University of Michigan Consumer Sentiment also UP from the month before.
For the week, the Dow ended UP 0.4%, to 10465.94; the S&P 500 was down 0.1%, to 1101.60; and the Nasdaq was off 0.7%, to 2254.70.
Even though July was a good month for stocks, the final week was fairly flat. This sent investors to bonds, bolstering prices. The FNMA 30-year 4.0% bond we follow gained 66 basis points for the week, ending at $102.41. Not surprisingly, Freddie Mac's weekly survey of conforming loans showed national average rates for conforming mortgages down for the sixth week in a row, some hitting record lows.
>> This Week’s Forecast
THE FED'S FAVORITES...The two things the Fed watches most are inflation and jobs. As long as jobs lag in the recovery, the Fed wants to keep rates down to encourage the economy. But with all the cheap money around, if inflation picks up, the Fed will start hiking rates. Tuesday's PCE readings are expected to show inflation is still not a problem. Friday, we get July's Employment Report, with payrolls forecast to be down, but by a smaller number than in June, and the Unemployment Rate remaining around 9.5%.
Tuesday's June Pending Home Sales are expected to be off slightly from their May drop following the expiration of the homebuyer tax credit. Q2 corporate earnings reports continue, including Dow components Procter & Gamble, Pfizer, and Kraft.
>> 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 2 – August 6
| Date |
Time (ET) |
Release |
For |
Consensus |
Prior |
Impact |
M
Aug 2 |
10:00 |
ISM Index |
Jul |
54.2 |
56.2 |
HIGH |
Tu
Aug 3 |
08:30 |
Personal Income |
Jun |
0.1% |
0.4% |
Moderate |
Tu
Aug 3 |
08:30 |
Personal Consumption Expenditures (PCE) |
Jun |
0.0% |
0.2% |
HIGH |
Tu
Aug 3 |
08:30 |
Core PCE Prices |
Jun |
0.1% |
0.2% |
HIGH |
Tu
Aug 3 |
10:00 |
Pending Home Sales |
Jun |
–5.0% |
–30.0% |
Moderate |
W
Aug 4 |
10:00 |
ISM Services Index |
Jul |
53.0 |
53.8 |
Moderate |
W
Aug 4 |
10:30 |
Crude Inventories |
7/31 |
NA |
7.31M |
Moderate |
Th
Aug 5 |
08:30 |
Initial Unemployment Claims |
7/31 |
455K |
457K |
Moderate |
Th
Aug 5 |
08:30 |
Continuing Unemployment Claims |
7/24 |
4.530M |
4.565M |
Moderate |
F
Aug 6 |
08:30 |
Average Workweek |
Jul |
34.1 |
34.1 |
HIGH |
F
Aug 6 |
08:30 |
Hourly Earnings |
Jul |
0.1% |
–0.1% |
HIGH |
F
Aug 6 |
08:30 |
Nonfarm Payrolls |
Jul |
–87K |
–125K |
HIGH |
F
Aug 6 |
08:30 |
Unemployment Rate |
Jul |
9.6% |
9.5% |
HIGH |
>> Federal Reserve Watch
Forecasting Federal Reserve policy changes in coming months The big surprise for economists would be if the Fed touched rates at all from now to November. The central bank first wants to see the economy growing at a far faster rate, with payrolls back on the rise. 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 |
| Aug 10 |
0%–0.25% |
| Sep 21 |
0%–0.25% |
| Nov 3 |
0%–0.25% |
Probability of change from current policy:
| After FOMC meeting on: |
Consensus |
| Aug 10 |
<1% |
| Sep 21 |
<1% |
| Nov 3 |
<1% |