| Key Indicator Summary - Happy Holidays! |
| Written by Jonathan Dienhart | |
| 12.18.2009 | |
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As our last Key Indicator Summary for 2009, we at Hanley Wood want to wish all of our readers and clients a safe and happy holiday! Equity markets remained fairly steady throughout the week as renewed fears in the labor markets offset positive housing data earlier in the week. On Thursday, initial unemployment claims posted an unexpected increase for the second consecutive week which reignited concerns that labor market conditions may not have stabilized just yet. This followed a report on Wednesday from the Commerce Department that new home starts rebounded 8.9% in November while building permits rose 6.0%. Housing starts were driven by a jump in multi-family activity which was coming off record lows in October. Leading economic indicators also posted an increase for the eighth consecutive month which suggests economic conditions will continue to improve going into next year. In terms of the stock market, the bulls have taken an early holiday break, with rallies subsiding in recent weeks and with the broader S&P 500 index continuing to hover around the 1,100 resistance level. The S&P 500 index was at 1,098 in early afternoon trading but is on track to finish the week marginally lower. The market has had a stellar run over the past three quarters but attention has now shifted towards what’s ahead in 2010 and whether economic fundamentals truly support elevated equity prices. With conditions in the labor market and monetary policy still uncertain, behavior has now shifted more towards a cautious optimism. The Federal Reserve held its last rate meeting of the year this past Wednesday and left their target Fed Funds rate unchanged at a range of 0-0.25%. While rates are expected to remain at these record low levels for quite some time, the Fed has been subtly signaling an end to its extremely accommodative programs and policies. Many of the Fed’s lending programs and facilities are set to expire on Feb. 1 and the conclusion of their Fannie and Freddie mortgage-back securities purchases are set to expire at the end of March. The conclusion of these programs will likely spell tighter lending conditions and higher rates going into the second half of next year. While the Fed stated that “inflation will remain subdued for some time” in their statement, recent consumer inflation data showed that higher energy prices have been slowly pushing headline inflation higher. Although inflation appears to be contained for the time being, at least as measured by the CPI, rising energy prices along with the massive amounts of government spending will pressure price levels going forward. How and when the Federal Reserve finally begins tightening the money supply is perhaps the biggest economic question mark for 2010. The Economy Initial unemployment claims posted an unexpected rise last week, sparking fears that labor market conditions may not have stabilized just yet. First-time claims increased to 480,000 which is up 7,000 from the previous week. This was the second straight week in which initial unemployment claims increased following five consecutive weeks of declines before that. Leading economic indicators posted gains for the eighth consecutive month in November. The leading index increased to a reading of 104.9 in November which is a 0.90 point gain from the revised 104.0 reading in October. November’s increase was driven by a drop in initial unemployment claims and an increase in building permits. Six out of the ten components in the leading index recorded a monthly gain while eight out of the ten components are higher than they were six months ago. The consumer price index (CPI) increased in November due to rising energy and transportation costs. In November, energy prices increased 4.1% which was driven higher by a 9.0% increase in fuel oil and a 6.3% jump in gasoline. The consumer price index rose a seasonally-adjusted 0.4% from October levels while the Core-CPI, which excludes food and energy, remained flat on a seasonally-adjusted basis. Headline inflation is up 1.8% from this time last year while the Core-CPI increased 1.7%. Housing Market U.S. housing starts rebounded in November after posting an unexpected drop in the previous month. Total housing starts were boosted by a jump in activity in the multi-family segment. Total starts increased 8.9% to a seasonally-adjusted annual rate of 574,000 units. Single-family starts increased 2.1% from October to 482,000 units while multi-family starts surged 67.3% to a 92,000 units. Multi-family activity is coming off record low levels last month. Lower mortgage rates and the extended homebuyer tax credit that is set to expire at the end of the first quarter will provide a short-term boost in housing demand. The NAHB Housing Market Index declined slightly in December and slipped back to its lowest levels since June. The index fell to a reading of 16 which is a one-point drop from a reading of 17 in November. Even lower mortgage rates and the extended and expanded homebuyer tax credit has not had a positive effect on homebuilder confidence. The winter months are typically the slowest months for home buying activity while many are worried that rising unemployment will suppress demand in the housing market. Building permits rose 6.0% in November to a seasonally-adjusted annual rate of 584,000 units. Both single and multi-family building permits increased last month. Single-family issuances increased 5.3% to a seasonally-adjusted annual rate of 473,000 units while the multi-family segment increased 8.8% to a seasonally-adjusted annual rate of 111,000 units. National average mortgage rates increased from the previous week to 4.94% in the latest Primary Mortgage Market Survey released weekly by Freddie Mac on December 17th. This was the second straight weekly increase in average fixed rates after hitting all-time low’s just two weeks ago. This is also the seventh straight week that fixed-rates have averaged lower than 5.0%. In the week ending December 11th, the MBA’s seasonally-adjusted purchase index declined a slight 0.1% from the previous week but was still down 12.87% compared to the same time last year. This was the first weekly decline for the purchase index in the past four weeks. Mortgage application activity has remained steady due to lower rates and the extended homebuyer tax credit. Refinances still make up the bulk of mortgage application activity as the refinance share of mortgages increased last week to 75.2% from 74.4% in the previous week. For market-level data and analysis please visit our website at http://www.hwmarketintelligence.com. For more detailed information on the indicators discussed in this key indicator alert, please visit the following links:
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