For the week of July 26, 2010

For the week of July 26, 2010

>> Market Update
INFO THAT HITS US WHERE WE LIVE Tuesday, June Housing Starts came in down 5.0% from May to a 549,000 annual rate. This was below expectations, but still up 15.1% from the low they hit in April 2009. Most of the drop came from volatile multi-family starts. Single-family starts were down a mere 0.7%. Most significantly, housing completions shot up 26.2% in June, the biggest monthly gain going back to the late 1960's. Builders clearly shifted focus from starting to finishing, as they pushed to close sales qualifying for the homebuyer tax credit. Finally, Building Permits were UP 2.1% for June, beating expectations, so things are looking up for the months ahead.

Thursday saw June Existing Home Sales down 5.1% to an annual rate of 5.37 million. But this beat expectations for the fourth time in five months and was 9.8% above sales a year ago. The median price for an existing home also gained in June, coming in at $183,700. This is up 1.0% from last year. In addition, the FHFA price index for homes financed by conforming mortgages went up 0.5% in May, increasing for the third month in a row.

National average rates for fixed rate mortgages hit new lows, according to Freddie Mac's weekly survey of conforming loans. So refinance applications shot up 7.6% over the week before, but best of all, purchase loan applications were also up a healthy 3.4%.

>> Review of Last Week
UP WE GO... It was another interesting week on Wall Street, with stocks briefly headed in the wrong direction before ending the week decidedly UP. The fact was, the good economic news simply outweighed any disappointments by a lot. The net result for the stock markets left all major indexes resoundingly UP for the week...from 3% to 4%!

Topping the disappointments were Fed Chairman Ben Bernanke's comments before Congress that the U.S. economic outlook is "unusually uncertain." This allowed him to add that the Fed stands ready to take additional action, if necessary, to either do more boosting or halt inflation. OK, but right now there's plenty of evidence the world's largest economy is recovering just fine, if at a slightly slower rate than before. Earnings from IBM and Amazon.com also disappointed, but overall there were pretty slim pickings for the bears.

There actually was a big batch of strong earnings. Of the 150 S&P500 companies who have reported Q2 results, 85% of them beat earnings estimates by an average of 7%. General Electric raised its quarterly dividend 20%, the first increase since it historically cut its dividend over a year ago. Even the media is beginning to admit companies appear to be doing well. Then Friday we got the long-awaited results of the European bank stress tests, which came out better than expected. There was some grousing over how stressful the tests truly were, even though the Committee of European Banking Supervisors hadn't seemed too soft before.

For the week, the Dow ended UP 3.2%, to 10424.62; the S&P 500 was UP 3.5%, to 1102.66; and the Nasdaq was UP 4.1%, to 2269.47.

Good news for the European banks and the stock market wasn't so good for the bond market. Investors stopped chasing safety plays, so bond prices suffered. The FNMA 30-year 4.0% bond we follow fell 16 basis points for the week, ending at $101.75. But, as reported above, national average rates for conforming mortgages remain at record low levels.

>> This Week’s Forecast
FROM NEW HOMES TO Q2 GDP... This week takes us on an economic trip across topics that range from Monday's June New Home Sales (expected to rise a bit) to Friday's Advanced Q2 GDP, likely to settle on moderate growth just shy of 3%. In between, Wednesday's Durable Goods Orders should be up, showing business continues to recover. We'll also watch Tuesday's Consumer Confidence and Friday's Michigan Consumer Sentiment. These are forecast to dip just a little.

Q2 corporate earnings reports continue, including BP, Boeing, Exxon Mobil, Sony, and Visa.
>> 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.

>> Federal Reserve Watch
Forecasting Federal Reserve policy changes in coming months Since Fed Chairman Bernanke still finds things "uncertain," economists are more certain than ever the Fed will keep rates at super-low levels for the rest of the 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%