Market Watch

by: Sharon Campbell

QUOTE OF THE WEEK… “What is harder than rock, or softer than water? Yet soft water hollows out hard rock. Persevere.” —Ovid, Roman poet

INFO THAT HITS US WHERE WE LIVE… The Latin bard offers good advice in the wake of last Thursday’s Pending Home Sales, down 1.6% for August. Observers said rising interest rates were partially to blame for the dip in this measure of contracts signed but not yet closed on existing homes. But national average mortgage rates have dropped the last two weeks with the Fed’s announcement it would continue buying mortgage bonds, which should boost bond prices and keep rates low. Also helping us persevere is the fact Pending Home Sales are still up 5.8% for the year.

Further encouragement came from single-family New Home Sales, up 7.9% in August and 12.6% year-over-year. They’re now at a 421,000 annual rate, not where they need to be, but rebounding strongly. There were also signs of continued success for home prices. The S&P/Case-Shiller 20-city home price index was up 0.62% in July, its 18th consecutive monthly gain, with all 20 metros ahead. Its 12.39% annual gain was its biggest since early 2006. The FHFA price index of homes financed with conforming loans was up 1% in July, also gaining 18 months in a row, and up 8.8% annually.

… Understand your customers. When you know their wants and needs top to bottom, you can focus on giving them exactly what they want in a way no one else can.

>> Review of Last Week

WATCHING THE BUDGET…  All week, the budget battle in Washington loomed large over Wall Street. The lack of progress, with the deadline for an agreement just days away, kept investors cautious, sending the Dow and the S&P 500 indexes down for the first time in four weeks, although the tech-heavy Nasdaq showed a miniscule gain. The Senate did pass a bill to avoid government shutdown, but as of Friday, it still needed House approval. The U.S. will also hit its borrowing limit on October 17 unless the debt ceiling is raised. With all this going on, economic data held little sway.

That data, as usual, was mixed. Durable Goods Orders were up 0.1% for August, following their drop in July. New Home Sales were up in August but Pending Home Sales were off. The Commerce Department left Q2 GDP, Third Estimate, unchanged, at an underwhelming 2.5% annual growth rate. The Fed’s favorite inflation measure, the Core PCE Price index, was up 0.2% in August and well within the Fed’s target range, up just 1.2% for the year. But Michigan Consumer Sentiment for September fell to its lowest final reading in five months.

The week ended with the Dow down 1.2%, to 15258; the S&P 500 down 1.1%, to 1692; but the Nasdaq was up 0.2%, to 3782.

The ongoing Washington budget wrangling drove many investors to the safe haven of bonds and prices continued to rise. The FNMA 3.5% bond we watch ended the week up 1.03, to $101.24. National average mortgage rates fell again in Freddie Mac’s Primary Mortgage Market Survey for the week ending September 26. Their chief economist commented, “These low rates should somewhat offset the house price gains… and keep housing affordability elevated.” Remember, mortgage rates can be extremely volatile, so check with your mortgage professional for up to the minute information.

…  A recent survey by a consumer financial services company reported that the majority of Americans, 55%, are confident that home prices will increase over the next 12 months.

>> This Week’s Forecast

MANUFACTURING, JOBS GROPE FORWARD… The continuing story of an economy that’s growing but oh so slowly should continue to be told this week. We’ll see two key reads on manufacturing in September, the national ISM Index and the Chicago PMI for the Midwest. Both are forecast just over 50, indicating expansion. The ISM Servicesindex is also expected to come in with a growth number, although slightly below August’s.

The first Friday of the month will feature, as always, the prior month’s Employment Report. September Nonfarm Payrolls are predicted to be up a little, although well under 200,000 per month. This should not budge the Unemployment Rate, still above the Fed’s 6.5% target.

>> 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 Sep 30 – Oct 4


 Date Time (ET) Release For Consensus Prior Impact
Sep 30
09:45 Chicago PMI Sep 53.7 53.0 HIGH
Oct 1
10:00 ISM Index Sep 55.1 55.7 HIGH
Oct 2
10:30 Crude Inventories 9/28 NA 2.635M Moderate
Oct 3
08:30 Initial Unemployment Claims 9/28 315K 305K Moderate
Oct 3
08:30 Continuing Unemployment Claims 9/21 2.825M 2.823M Moderate
Oct 3
10:00 ISM Services Sep 57.4 58.6 Moderate
Oct 4
08:30 Average Workweek Sep 34.5 34.5 HIGH
Oct 4
08:30 Hourly Earnings Sep 0.2% 0.2% HIGH
Oct 4
08:30 Nonfarm Payrolls Sep 183K 169K HIGH
Oct 4
08:30 Unemployment Rate Sep 7.3% 7.5% HIGH


>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months… No one expects a hike in the Fed Funds Rate until well after it ceases its bond buying. As the Fed hasn’t even begun to taper that program, economists now expect a super low Funds Rate through much of 2014. 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
Oct 30 0%–0.25%
Dec 18 0%–0.25%
Jan 29 0%–0.25%

Probability of change from current policy:

After FOMC meeting on: Consensus
Oct 30      <1%
Dec 18      <1%
Jan 29      <1%