Last week, two parts of the housing market seemed to have difficulties, starting with Existing Home Sales, which dipped 2.8% in December to 5.49 million unit annual rate. Even with this monthly decline, 2016 was the best year in a decade for existing home sales.
Sales of single-family homes, townhomes, condominiums and co-ops came in at 5.45 million units, this was the highest level since 2006, even though supplies were low in many areas.
Opportunity lies in rates still being near historic lows, growing incomes and analyst expectations that the upward sales trend will continue.
Later in the week, New Home Sales came reported being down 10.4% for December to a 536,000 annual rate. At first, this seemed like another difficulty but home sales are volatile month-to-month (ask any realtor) and the year showed a different picture. In 2016, there were 563,000 new single-family home sales, up 12.2% from 2015 and the highest level since 2007. December's glitch can be seen as one more example of a housing market that's been recovering in fits and starts. Analysts see a shift back toward single-family homes and expect that any headwinds from modest rate and price increases will be offset by faster economic growth.
Review of Last Week
Last Wednesday the Dow Jones Industrial Average broke through 20,000 for the first time in history. This closely watched index of 30 blue chip stocks soared into this new territory capping weeks of strong market performance following the election. The S&P 500, which covers a wide range of companies, ended the week nicely ahead, while the Nasdaq, dominated by technology firms, went up the most. The stock market is seen as a leading indicator of the economy, so the recent performance of these indexes shows that investors clearly expect faster economic growth with the new leadership in Washington.
For the moment, we can only ponder data on economic performance under the prior administration and most reports last week disappointed. In addition to the monthly housing misses, the GDP (Advanced) reading for Q4 of 2016 put economic growth at a 1.9% annual rate. That's the same rate we've seen the last two years, reflecting the slow pace of this economic recovery. Durable Goods Orders also under performed, contracting in December but University of Michigan Consumer Sentiment in January hit its highest level in more than a decade, as Americans on Main Street seem as economically optimistic as traders on Wall Street.
The week ended with the Dow UP 1.3%, to 20094; the S&P 500 UP 1.0%, to 2295; and the Nasdaq UP 1.9%, to 5661.
Friday's disappointing Q4 GDP reading gave bonds a boost. The 30YR FNMA 4.0% bond we watch finished the week UP .03, at $104.80. For the first time since December 29, national average 30-year fixed mortgage rates rose in Freddie Mac's Primary Mortgage Market Survey for the week ending January 26, though rates are still near historically low.
This Week’s Forecast
Economists expect a spate of decent reports for a change and are predictong Pending Home Sales up in December after sliding the month before. The Core PCE Prices inflation measure should also be up, along with the Employment Cost Index, a forward looking inflation indicator (when worker costs go up, prices eventually follow). Manufacturing is predicted up in the Midwest by the Chicago PMI and nationally as well, by the ISM Index and a few more Non-farm Payrolls are forecast for January however none of this good news shows the kind of economic strength the Fed needs to hike again, so the FOMC Rate Decision should be, "no change."
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 Jan 30 – Feb 3
Jan 30 08:30 Personal Income
Jan 30 08:30 Personal Spending
Jan 30 08:30 Core PCE Prices
Jan 30 10:00 Pending Home Sales
Jan 31 08:30 Employment Cost Index
Jan 31 09:45 Chicago PMI
Jan 31 10:00 Consumer Confidence
Feb 1 10:00 ISM Index
Feb 1 10:30 Crude Inventories
Feb 1 14:00 FOMC Rate Decision
Feb 2 08:30 Initial Unemployment Claims
Feb 2 08:30 Continuing Unemployment Claims
Feb 2 08:30 Productivity - Prelim.
Feb 2 08:30 Unit Labor Costs
Feb 3 08:30 Average Workweek
Feb 3 08:30 Hourly Earnings
Feb 3 08:30 Nonfarm Payrolls
Feb 3 08:30 Unemployment Rate
Feb 3 10:00 ISM Services
Federal Reserve Watch
Speculative Forecasting Federal Reserve policy changes in coming months:
It would be a big surprise to virtually all economists if the Fed raised rates this week. Additionally, the majority still do see a hike before June.
Note: In the lower chart, a 4% probability of change is a 96% certainty the rate will stay the same.
Current Fed Funds Rate: 0.5%-0.75%
After FOMC meeting on:
Feb 1 0.5%-0.75%
Mar 15 0.5%-0.75%
May 3 0.5%-0.75%
Probability of change from current policy:
After FOMC meeting on:
Feb 1 4%
Mar 15 25%
May 3 43%
Where are interest rates headed?
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