Inside Lending - Week of June 16th

[Minuteman]

For the week of June 16, 2008 – Vol. 6, Issue 24

>> Home Base

INFO THAT HITS US WHERE WE LIVE Last week a leading gauge of US home sales showed unexpected strength. April Pending Homes Sales rose 6.3%, way over expectations of a 1.0% drop! This measure of signed sales contracts registered a level of 88.2, its highest in six months. A 100 reading equals the average sales activity in 2001. Experts are saying the April figure suggests the pace of home sales has clearly stopped its free fall and might soon rebound. The index measures existing home sales, currently about 85% of the market.

The other economic news that was positive for housing came from Fed Chairman Ben Bernanke. In a speech Monday, he said he believes the economy is out of danger and the Fed would now pay "close attention" to inflation. Experts immediately interpreted this to mean rate cuts are officially over. Some feel a hike may come as soon as August and many consider a 0.25% increase likely for October. This is good news because while the Fed was in rate trimming mode, many potential homebuyers stayed on the sidelines, waiting for rates to fall more. Now they need to get back in the game and make sure they don't wait and get caught with rates climbing back up!
>> Review of Last Week

DOWN, UP, FLAT... The markets were down at the beginning of the week, then up at the end, but the overall indexes stayed pretty much the same as the previous week. It seems investors are feeling positive about the economy, but negative news can still shake their confidence.

Unwelcome news came from investment bank Lehman Brothers, who pre-announced a Q2 loss big enough to get the CFO and COO booted. This was followed by inflation worries expressed by some Fed board members. The good ramifications of this are covered in Home Base, above, though inflation fears do get investors concerned.

But hold on. We had some pretty good economic data. April Pending Home Sales rose, as reported above. May retail sales were up 1.0%, double the expected number. In fact, retail sales are up at an 8% annual rate in the past three months, with "core" retail sales, excluding autos, up at a 10.2% annual rate! Experts tell us it is impossible to be in a consumer-led recession when retail sales are growing so rapidly. Would someone please tell the media? The dollar strengthened which sent oil down 2.8%, to $134.70 a barrel. Even merger activity picked up, a good economic sign, with several new deals in the news, although it appears Microsoft–Yahoo! is off. Friday's Consumer Price Index (CPI) was up 0.6%, but that was better than some feared, given Fed members' comments earlier in the week.

Friday's rally saw the Dow end the week up 0.8%, at 12,307.35. The S&P 500 came in virtually flat for the week at 1360.03. The NASDAQ dipped 0.8%, to 2454.50.

In the bond market, increased expectations of a Fed rate hike to curb inflation sent yields on Treasuries higher. The yield on the benchmark 10-year Treasury, which is very sensitive to inflation pressures, rose 33 basis points (.33%) to 4.255%. This hints at higher mortgage interest rates, so homebuyers should stay alert and look to make a move sooner rather than later.
>> This Week’s Forecast

AS WALL STREET GOES... This week we see earnings results from three major Wall Street banks--Goldman Sachs, Morgan Stanley and Lehman Brothers. We also get important corporate reports from Best Buy, FedEx and Carnival.

The key economic indicators coming out will be Housing Starts, the Producer Price Index and Industrial Production. The week will end with the Philadelphia Fed Index, a regional measure many experts feel is a reliable indicator of economic health. Any of these reports could have market-moving impact.
>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months. Experts interpreted Chairman Ben Bernanke's comments this week to mean the Fed is done with rate cuts. The big question now is when rates may rise. There's growing feeling they could go up as early as August. Many think a 25 basis point (.25%) hike will come in October.