Home builders went to work as Housing Starts shot up 6.6% in April to 1.172 million. Naysayers pointed out starts suffering a decline in March so April's number is still down 1.7% from a year ago. This is due to a slow-down in multi-family construction. Single-family starts are up 4.3%. Likewise, new building permits for single-family units are up 8.4% versus a year ago, while overall permits were up 3.6% in April, to a 1.116 million annual rate. The experts say we need starts to get to 1.5 million units a year, so there's room for lots more recovery ahead.

There wasn't anything negative about the National Association of Realtors (NAR) report that Existing Home Sales rose in April for the second straight month, up 1.7%, to a 5.45 million unit annual rate, beating all forecasts. The NAR's chief economist sees momentum building for the spring housing market, noting "sales activity overall was at a healthy pace last month, as very low mortgage rates and modest seasonal inventory gains encouraged more households to search for and close on a home." But Freddie Mac's chief economist cautioned that mortgage rates could begin to change, given "the hawkish tone of Wednesday's Fed minutes release." Let's hope he's overreacting.

Review of Last Week

Fed rate hike chatter dominated Wall Street, as comments from central bank officials suggested a June rate boost is possible. FOMC Minutes from the Fed's April confab included this shocker: "...if incoming data were consistent with economic growth picking up...labor market conditions continuing to strengthen, and inflation making progress toward the Committee's 2.0% objective, then it would likely be appropriate...to increase the target range for the federal funds rate in June." June?! Stocks tanked Thursday, but cooler heads prevailed Friday, leaving the S&P 500 and the Nasdaq ahead for the week, though the Dow ended lower.

Economic reports presented the usual mixed bag of data. We had the good Housing Starts, Building Permits and Existing Home Sales covered above, plus a home builders confidence index showing the majority of respondents see favorable market conditions. But manufacturing keeps struggling, with both the Philadelphia Fed and the NY Empire Indexes reporting contraction in those regions in May. Nationally, Industrial Production was up 0.7% in April, although Capacity Utilization showed factories running at around 75% capacity. Consumer Price Index (CPI) inflation is up 1.1% from a year ago, not quite what the Fed wants to see.

The week ended with the Dow down 0.2%, to 17500; the S&P 500 UP 0.3%, to 2052; and the Nasdaq UP 1.1%, to 4770.

Not a great time was had in the bond market, as all the talk about a possible Fed rate hike sent prices south. The 30YR FNMA 4.0% bond we watch finished the week down .24, at $106.67. In Freddie Mac's Primary Mortgage Market Survey for the week ending May 19, national average 30-year fixed mortgage rates barely moved up, remaining significantly below where they were a year ago. Remember, mortgage rates can be extremely volatile, so check with your mortgage professional for up-to-the-minute information.

Did you know? Fannie Mae's chief economist thinks "the vote on whether the U.K. will leave the European Union, scheduled to occur about a week after the June FOMC meeting, should keep the Fed from raising interest rates next month."  

This Week’s Forecast

New and Pending Home Sales Gain, Economic Growth Stays Weak

Housing continues to recover, as New Home Sales are expected to move up in April. Pending Home Sales, which measure contracts signed on existing homes, are also predicted to grow in April, pointing to a gain in those sales a couple of months out. All this is happening despite a very slow growing economy: the GDP - 2nd Estimate is forecast to show economic growth remaining below 1% for the year.

This Friday, May 27, the bond market closes early, and next Monday, May 30, the stock and bond markets are closed, in observance of Memorial Day.

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 May 23 – May 27

May 24th    10:00    New Home Sales   
May 25th    10:30    Crude Inventories
May 26th    08:30    Initial Unemployment Claims
May 26th    08:30    Continuing Unemployment Claims
May 26th    08:30    Durable Goods Orders
May 26th    10:00    Pending Home Sales
May 27th    08:30    GDP - 2nd Estimate
May 27th    10:00    University of Michigan Consumer Sentiment
                                                                                                 
Federal Reserve Watch    

Forecasting Federal Reserve Policy Changes in Coming Months

After last week's release of FOMC Minutes, the majority of economists expect a pass on a rate hike in June, but then see a 0.25% bump in July and another in September. Note: In the lower chart, a 26% probability of change is a 74% certainty the rate will stay the same.

Current Fed Funds Rate: 0.25%-0.5%

After FOMC meeting on:  

Jun 15    0.25%-0.50%
Jul 27    0.50%-0.75%
Sep 21    0.75%-1.00%

Probability of change from current policy:

After FOMC meeting on:

June 15th 26%
July 27th 53%
September 21st 64%

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This morning, you have to give a nod to those who say the bull market is cooling off.

We've now had three losing weeks in a row for the blue-chip Dow and the broadly based S&P 500, while the tech-heavy Nasdaq has given us four down weeks.

Traders saw another batch of first quarter corporate earnings, and with 92% of the S&P 500 companies reporting, earnings are down 7.6% year-over-year. Investors were also worried about crude oil prices moving lower and Chinese banks pulling back on lending. But those clouds had a silver lining: Fed Governor Lael Brainard indicated the "challenging" global environment keeps her from voting for a rate hike.

Retail Sales in April took their biggest jump in a year, up a very strong 1.3%. Curiously, this report contrasted sharply with disappointing earnings and forecasts from a couple of flagship brick-and-mortar stores. But a big part of April's gain came from online and mail-order retailers, so the contradictory data can be explained by shifting channels, rather than slowing sales. Wages are gradually improving, allowing consumers to spend more at retail--and on housing! They're clearly feeling better, as the Michigan Consumer Sentiment index shot up surprisingly to 95.8 in May from its disappointing 89.7 in April.

The week ended with the Dow down 1.1%, to 17540; the S&P 500 down 0.5%, to 2047; and the Nasdaq down 0.4%, to 4719.

The week's stock rout sent investor money to the safe haven of bonds. The 30YR FNMA 4.0% bond we watch finished the week UP .02, at $106.91. In Freddie Mac's Primary Mortgage Market Survey for the week ending May 12, national average 30-year fixed mortgage rates fell for the third week in a row, to their low point for the year. Remember, mortgage rates can be extremely volatile, so check with your mortgage professional for up-to-the-minute information.

This Week’s Forecast

This week's economic reports are expected to show two major components of the housing market moving in the proper direction. Housing Starts and Existing Home Sales should show gains for April. But inflation is forecast to be up too, as measured by the Consumer Price Index (CPI) and Core CPI, which takes out volatile food and energy prices. Wednesday's release of FOMC Minutes from the Fed's last meet will have pundits prognosticating when we'll see the next rate hike, as if anybody knows.

This 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 May 16th – May 20th

May 16th    08:30    NY Empire Manufacturing Index   
May 17th    08:30    Consumer Price Index (CPI) 
May 17th    08:30    Core CPI   
May 17th    08:30    Housing Starts
May 17th    08:30    Building Permit
May 17th    09:15    Industrial Production
May 17th    09:15    Capacity Utilization
May 18th    10:30    Crude Inventories   
May 18th    14:00    FOMC Minutes   
May 19th    08:30    Initial Unemployment Claims   
May 19th    08:30    Continuing Unemployment Claims   
May 19th    08:30    Philadelphia Fed Index
May 19th    10:00    Leading Economic Index (LEI)
May 20th    10:00    Existing Home Sales

What‘s Ahead

This week’s scheduled economic reports include the National Association of Home Builders Housing Market Index and Commerce Department reports on housing starts and building permits issued. Monthly reports on inflation are also expected.The National Association of Realtors® will release its report on existing home sales. Weekly reports on new jobless claims and mortgage rates will also be released.

Federal Reserve Watch    

Forecasting Federal Reserve policy changes in coming months:

There may be more conversation in the media about a June rate hike, but most economists don't see the Fed touching rates through September.

Note: In chart below, a 4% probability of change is a 96% certainty the rate will stay the same.

Current Fed Funds Rate: 0.25%-0.5%

After FOMC meeting on:

June 15th 0.25%-0.50% 
July 27th 0.25%-0.50% 
September 21st 0.25%-0.50%

Probability of change from current policy:

After FOMC meeting on:

June 15th 4% 
July 27th 20%
September 21st 39%

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Mortgage rates fell last week according to Freddie Mac’s Mortgage Market Survey. Other economic news included reports on construction spending, public and private and national sector employment.

Construction Spending Grows in March

The Commerce Department reported that the growth rate for construction spending fell in March to 0.30 percent/Analysts expected a reading of 0.70 percent based on February’s upwardly revised growth rate of 1.0 percent. Construction spending was propelled by a 1.50 percent increase in residential construction spending; this is good news for would-be home buyers who’ve been shut out of the market due to high demand and low inventories of available homes.

Housing market analysts have repeatedly said that new home construction is the answer to short supplies of homes and high buyer demand. Year-over-year, construction spending is up 8.0 percent overall; residential construction spending grew by 7.60 percent year-over-year.

Mortgage Rates Dip

Average mortgage rates were lower last week. The rate for a 30-year fixed rate mortgage fell by five basis points to 3.61 percent; the average rate for a 15-year fixed rate mortgage was three basis points lower at 2.86 percent and the average rate for a 5/1 adjustable rate mortgage dropped six basis points to an average of 2.80 percent.

While any drop in mortgage rates is welcomed by home buyers, the high demand for homes continues to drive prices up and has raised concerns about affordability of single-family homes in many communities.

Jobs Growth Slows

The national unemployment rate held steady at 5.0 percent in April, but job growth slowed in public and private sectors. ADP reported private sector jobs increased by 156,000 jobs as compared to 194,000 jobs added in March. According to the Bureau of Labor Statistics, Non-Farm Payrolls increased by 160.000 jobs as compared to expectations of 203,000 jobs added and March’s reading of 208,000 jobs added. Non-Farm payrolls measure public and private sector job growth.

New jobless claims rose by 17,000 to 274,000 new claims, but remained below the benchmark of 300,000 new claims for 61 consecutive weeks. Analysts projected that new claims would grow by 265,000 new claims based on the prior week’s reading of 257,000 new claims. The less volatile four-week rolling average of new jobless claims indicated that 258,000 new claims were filed. The labor force participation rate dropped from 65 percent to 63 percent in March. Retiring baby boomers contributed to some but not all of this workforce decline.

What’s Ahead

This week’s scheduled economic news includes weekly reports on mortgage rates and new jobless claims along with a report on consumer sentiment.

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