MARKET UPDATE–is the market and economy stabilizing?

The economic reports before Thanksgiving were all positive! Monday saw Existing Home Sales UP 10.1% to an annual rate of just over 6 million, the highest since February 2007. Sales are now up 20% in the past two months and up 36% from January lows. The supply of existing property inventory was down to just 7 months– the lowest level in almost three years. This puts existing homes very close to the 6-month supply level of a healthy housing market. The Case-Shiller 20-City Composite Home Price Index rose 0.3% in September. The index also showed its second consecutive quarterly increase, UP 3.1% for Q3, returning to August 2003 levels.

Freddie Mac reported mortgage rates down for the fourth straight week, reaching historic lows well below 5%, with an average 0.7 point, for prime borrowers with 20% down payments. Freddie Mac’s chief economist said, “Interest rates for 30-year fixed-rate loans are currently 0.8 percentage points below this year’s peak set in mid-June, which shaves roughly $100 off the monthly payments on a $200,000 mortgage.”

New single-family Home Sales were UP 6.2% in Oct. to an annual rate of 430,000 properties that have changed hands. New Home Sales are now UP 30.7% over their January low. The unsold supply of new homes declined to 6.7 months as of Oct., with inventories at 239,000, 58.2% down from their mid-2006 peak and at their lowest level since mid-1971. The median price was down only 0.5% from a year ago and average price down just 4.7%.

>> Review of Last Week

With market gains and encouraging economic reports. Retailers’ Black Friday exceeded expectations, but unfortunate financial news from Dubai turned Wall Street’s Friday a depressing black, with the Dow losing 154 points on the day. The Dubai government announced there would be a six-month standstill on debt repayments for Dubai World, its holding company. This sent world markets reeling with fears of multi-billion dollar defaults. Fortunately, Dubai is part of the super-wealthy United Arab Emirates (U.A.E.), which should provide deep support. In addition, U.K. and European banks, with little U.S. involvement, mostly hold Dubai’s debt. The situation bears watching, although our recovery remains clearly on track.

On Tuesday, for example, Q3 GDP growth was revised down to a still substantial 2.8% annual rate. The key item in the report was the look at Q3 corporate profits, which grew at a very strong 50% annual rate, the third consecutive quarterly increase. Wednesday, initial jobless claims dropped to 466,000, sending the four-week moving average down to 496,500, below the level a year ago. Continuing claims are now down to 5.423 million. The Richmond Fed Manufacturing index showed expansion of activity for the seventh straight month.

Consumer Confidence went up to 49.5 for November, beating consensus estimates. This tied in nicely with Wednesday’s reports showing personal incomes are rising, consumer spending is up and the savings rate is 4.4% vs. 1.7% just two years ago. Even non-mortgage consumer debt is down 5% from its mid-2008 peak.

Nonetheless, the Dubai surprise left the Dow off 0.1% for the week, at 10309.92; the S&P 500 was up just 0.11 points, to 1091.49; while the Nasdaq slipped 0.4%, to 2138.44.

Prices held higher in the bond market, as investors anticipate the fall-out from Dubai and its state supported debt issues. The FNMA 30-year 4.5% bond we watch ended up 72bp from the previous week’s close, finishing at $102.50. Mortgage rates, as noted above, fell last week to historically low levels!

>> This Week’s Forecast

FOCUS ON JOBS… The week opens with insight into the continually improving manufacturing sector, while Pending Home Sales figures hold our interest on Tuesday. But the real focus for the week will be on Friday’s November jobs report. Analysts will be looking for further signs of recovery in this lagging economic indicator. The consensus expects the unemployment rate to plateau, which is an improvement over rates on the rise.

>> 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 November 30 – December 4

Date Time (ET) Release For Consensus Prior Impact
M
Nov 30 09:45 Chicago PMI Index Nov 53.0 54.2 HIGH
Tu
Dec 1 10:00 ISM Index Nov 54.8 55.7 HIGH
Tu
Dec 1 10:00 Pending Home Sales Oct –0.5% 6.1% Moderate
W
Dec 2 10:30 Crude Inventories 11/27 NA 1.02M Moderate
Th
Dec 3 08:30 Initial Unemployment Claims 11/28 483K 466K Moderate
Th
Dec 3 08:30 Continuing Unemployment Claims 11/21 5.517M 5.423M Moderate
Th
Dec 3 08:30 Productivity–Rev. Q3 8.5% 9.5% Moderate
Th
Dec 3 08:30 Employment Cost Index Q4 NA 0.4% HIGH
Th
Dec 3 10:00 ISM Services Index Nov 51.5 50.6 Moderate
F
Dec 4 08:30 Average Workweek Nov 33.1 33.0 HIGH
F
Dec 4 08:30 Hourly Earnings Nov 0.2% 0.3% HIGH
F
Dec 4 08:30 Nonfarm Payrolls Nov –114K –190K HIGH
F
Dec 4 08:30 Unemployment Rate Nov 10.2% 10.2% HIGH

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months. The Fed continues to affirm it will keep rates down until the recovery looks more solid, but inflation is always a concern. Overall consumer prices in the last six months are up at an annual rate of 2.7%, but economists don’t expect any rate changes in the near future. 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
Dec 15 0%–0.25%
Jan 27 0%–0.25%
Mar 16 0%–0.25%

Probability of change from current policy:

After FOMC meeting on: Consensus
Dec 15 1%
Jan 27 1%
Mar 16 3%