Equities are poised to finish higher than a week ago despite a Friday sell-off because of exuberant activity earlier in the week.  The market soared on Monday after the European Union announced a $1 trillion emergency rescue plan to address concerns over debt defaults in Greece and potentially other deficit-troubled EU nations like Portugal, Ireland and Spain.  The bail-out package is similar to the United State’s TARP (Troubled Asset Relief Program) in 2008 which will provide emergency relief funds and loan guarantees to these nations that are swamped with debt and unable to shore up credit.

But the relief package is somewhat of a Catch-22.  While Eurozone leaders felt they had no choice to address the immediate threat of default in Greece, the package will create larger debt burdens for the EU as a whole going forward.  And now that the euphoria from Monday’s news has faded, the market has shifted its focus to these concerns on Friday which is partially the reason why all three major indices have been trading significantly lower through morning trading.

Domestically, most signs continue to point to an improving economy.  First quarter earnings reports were generally positive which suggests conditions in corporate America have stabilized.  GDP figures the economy expanding for the third straight quarter to begin the year.  Consumers are getting their confidence back as suggested by recent consumer confidence and sentiment surveys while retail sales continue to steadily increase.  The economy has added over half a million jobs in the past three months which shows employment is finally picking up, although unemployment remains high. 

Two big hurdles still loom over the markets.   First, the economic and fiscal condition of major European nations will undoubtedly have an effect on trade and growth for the rest of the world.  If troubles escalate in the EU, the consequences will be felt all over which may drag the U.S. into another recession.  Secondly, the U.S. housing market is the other barrier to a full economic recovery.  While home sales have increased leading up to the expiration of the federal homebuyer tax credit, demand will likely wane after the summer months.  Mortgage defaults remain high and although employment conditions have incrementally improved, the labor market is still a difficult landscape.  The drop in demand is already evident as purchase applications reported by the Mortgage Bankers Association dipped just a week after the tax credit expired.

The Economy
On Friday, the Commerce Department reported that U.S. retail sales increased for the 11th consecutive month in April.  Retail sales rose a seasonally-adjusted 0.4% which was higher than most economists had expected.  Figures were also revised higher for February and March.  The steady increase in retail sales numbers shows that the U.S. consumer is alive and well which will help support economic growth during the second quarter of the year.

The Reuters/University of Michigan consumer sentiment index rose in May to a reading of 73.3 from 72.2 in April.  The rise in consumer confidence will continue to drive retail sales and fuel economic growth.

First-time unemployment claims fell fractionally during the past week.  Weekly jobless claims fell by 4,000 in the week ending May 8th to a seasonally-adjusted figure of 444,000.  Stability in the weekly claims number shows that job losses have been subdued and employment conditions will continue to improve.

Housing Market
National average mortgage rates declined from the previous week to 4.93% in the latest Primary Mortgage Market Survey released weekly by Freddie Mac on May 13th.  Rates have not recorded a weekly increase in the past five weeks and are back to their lowest levels since the middle of February.  In the week ending May 7th, the MBA’s seasonally-adjusted purchase index declined 9.5% from the previous week and was down a slight 0.8% compared to the same time last year.  This is the first time the purchase index has declined in the past four weeks.  However, overall mortgage application activity still increased last week due to stronger refinance activity.

Despite lower rates which caused refinance activity to jump last week, purchase activity dipped which is a sign that demand has definitely diminished since the expiration of the federal homebuyer tax credit just a couple of weeks ago.  It will be interesting to keep an eye on home sales in the summer months as mortgage rates will likely move higher from here.

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