The Weekly Rap! Friday Apr 26th, 2013

The Dow last traded at 14,710 about 200 pts higher than last Friday.  The S&P 500 is trading at 1,580.  Gold is trading lower at $1,476 an ounce, while oil futures at $93.04 a barrel.  Gas prices, (Regular in El Dorado Hills, Costco, AM/PM), are at $3.63/Gal.

Yields on 10-year Treasury notes, which move inversely to prices, last traded at 1.67%.  30-year Treasury Bond yields last traded at 2.86%.  Mortgage Bonds have broken out of the downward trend (higher rates) they’ve been trading in since Dec 5, 2012 and look to have established a higher range (lower rates).  The MBS (Mortgage Backed Security) FNMA 30-year fixed 3.0% coupon, containing 3.25-3.625% mortgages, pretty much the benchmark or how rate sheets are priced these days  is currently trading at 104.46 a tad better than where we were last Friday.  Basically each percent change in the price of the security translates to the price (or points paid or credited) of the mortgage rate.  The higher the number (price), the better the rate.

In economic news this week; the reader’s digest version is that the economy looks to be slowing again.  GDP is higher but you have to read the details, Durable Goods orders were down, but the housing market continues to improve. Consumers are less optimistic about the ability of the economy to continue to expand without a renewed downturn sometime in the next five years.

According to the Chicago Fed’s national activity index, the economy ran below trend potential in March. The index weights 85 different economic indicators and is designed so that readings above zero indicate the economy is growing above average historical trends, and readings below zero indicate the economy is running below-average trend growth. When the three-month moving average moves below -0.70, there’s an increasing likelihood a recession has begun. In March, the index swung to -0.23 from +0.76 in February, and the three-month moving average fell to -0.01 from +0.12.

The National Association of Realtors said sales of existing homes declined in March falling 0.6% to an annual rate of 4.92 million possibly signaling a pause in the market as potential sellers were apparently reluctant to put their homes on the market.  Low inventories of existing homes for sale are constraining activity, according to NAR. The supply of existing homes available for sale has remained under 2 million since October, and has decreased 17% over the past year. Inventories are expected to see a large gain in April as the buying season heats up. Despite March’s decline, sales were up 10.3% over the last 12 months.

Median prices hit $184,300 in March, up 11.8% from the same period last year, the largest year-over-year price growth since November 2005.  Low inventories are supporting prices, and the median price has benefited from less distressed home activity, NAR said.  Distressed homes made up 21% of sales in March, the lowest share since data collection began in 2008, down from 29% during the same period last year.

Sales of new single-family homes rose in March following a substantial drop in February, signaling restarted momentum in the housing market.  With near-record-low interest rates continuing to support affordability, sales were 18.5% higher than during the same period last year, and the expectation is for the housing market to continue to gain momentum this year.  There’s room to grow: Despite last month’s gains, the sales rate remains far below a peak of almost 1.4 million in 2005, though that bubble level is far higher than economists say is healthy.

GDP or Gross domestic product expanded at a 2.5% annual rate in the first quarter, up from a paltry 0.4% at the end of 2012. Businesses restocked warehouses shelves at a faster clip and consumer spending posted the biggest gain in more than two years.  The acceleration in growth in the early stages of 2013 appears to stand in sharp contrast to the fourth quarter and may look like a positive sign, but the underlying strength of demand for U.S.-made goods and services was actually weaker in the first quarter.

So-called “real final sales”, which removes unsold goods, rose just 1.5% and matched the smallest increase in two years. It was down from 1.8% in the prior quarter.  The softness in demand suggests little change in the overall pace of growth once unusual factors are stripped out. The economy has been expanding at about a 2% clip for the past two years. Hardly anything to get excited about and in my opinion not good enough to justify record breaking stock market levels.

Durable goods (products designed to last at least three years) posted the biggest drop in March since last summer, mainly because of fewer jetliner bookings, but the generally soft report added to mounting evidence that the economy has slowed again.  Orders fell 5.7% last month to mark the biggest drop since last August.  These orders are critical component of economic growth since rising sales of autos, computers, furniture and so forth signal an improving economy.

What’s bad for the economy is good for interest rates though, sort of a balancing effect.  The modest pace of growth, combined with low inflation, indicates little end in sight for the Fed’s multibillion-dollar bond purchase program aimed at keeping interest rates low

As you would expect given the reports, consumer sentiment fell to a three-month low in April, led by lower expectations.  The University of Michigan-Thomson Reuters consumer-sentiment gauge fell to a final April reading of 76.4, the lowest result since January, from a final March reading of 78.6. This is clearly consistent with an economy that has no clear upside momentum. In April we faced negative news on jobs and federal spending, though we also saw stocks rise and gasoline prices decline. In addition, we’ve been hit by higher payroll taxes. The sentiment gauge, which covers how consumers view their personal finances as well as business and buying conditions, averaged about 87 in the year before the start of the most recent recession.

Bill

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