Wall St. pulled back on Friday due to weaker earnings results and a larger than expected drop in a key consumer sentiment index.  The Reuters/University of Michigan consumer sentiment index fell to a reading of 69.4 in October from 73.5 last month.  Larger than expected losses from Bank of America during the third quarter also added pressure to the selling on Friday.  The weak earnings announcement from Bank of America followed weaker than expected results from Citi and Goldman Sachs on Thursday.  The disappointing results from these financial stalwarts shows that things have not fully recovered yet and that consumers and businesses continue to struggle from the weaker economy and rising unemployment.

Although stocks continued to rally to begin the fourth quarter, all major indexes look to be headed lower today.  The Dow Jones Industrial Index closed above the 10,000 level earlier in the week for the first time since the financial crisis hit last October, and after some muted glee at reaching the milestone again, has now retreated back to under those levels through mid-day trading.  The broader S&P 500 index reached its highest close yesterday since October 3, 2008 but is still hitting resistance to top the 1,100 level; the S&P 500 index has not closed above those levels since last October.  However, the S&P is still trading over 2% higher since the beginning of the month.  The markets will continue to be driven by earnings announcements as they represent a key measure of the velocity of economic recovery.

The National Association of Realtors reported positive news on the housing front at the beginning of the month.  The realtor group’s Pending Home Sales Index rose for the seventh straight month in August.  While encouraging, the fate of a housing market recovery is more than likely now in the hands of the broader economy.  With persisting high unemployment and uncertain consumers, housing demand is not likely to substantially increase until there are more convincing signs we are in a true recovery phase.

The Economy

The consumer price index in September increased slightly driven by higher transportation and energy costs.  The consumer price index in September increased 0.1% from August on a non-seasonally adjusted basis and increased 0.2% from the previous month on a seasonally-adjusted basis.  The core-CPI, which excludes the food and energy portions that are seen by some as skewing the index by virtue of their volatility, increased 0.2% from August on a non-seasonally adjusted basis while also increasing 0.2% from the previous month on a seasonally-adjusted basis.  On an unadjusted basis, headline CPI fell 1.3% from its year ago levels while core CPI increased 1.5% year-over-year in September.  This is the seventh straight month that headline consumer prices have recorded a year-over-year decline.  It will be important to keep an eye on inflation going forward due to rising crude prices and the massive government spending that has taken place to restore the economy.

U.S. retail sales fell 1.5% in September due to the expiration of the Cash for Clunkers program which caused auto sales to fall 10.4% from the previous month.  However, excluding auto sales, retail sales increased a better than expected 0.5%.  The increase gives hope that consumers are starting to spend money again even though unemployment is still rising.  Obviously though, such a trend is unsustainable unless the economy sees a return to job growth conditions.  The drop off in auto sales from the ending of the Cash for Clunkers program may also be instructive when it comes to the housing tax credit, which expires in November.  Should the home buyer tax credit be allowed to expire, we will likely see an impact on home sales during what is already a seasonably slow time of year. 

Housing Market

The National Association of Realtor’s Pending Home Sales Index increased 6.4% to a reading of 103.8 in August from a reading of 97.6 in July.  This was the seventh straight month in which the index has increased and the highest it has been since March 2007.

National average mortgage rates increased from the previous week to 4.92% in the latest Primary Mortgage Market Survey released weekly by Freddie Mac on October 15^th.  This is the first time mortgage rates have recorded a weekly gain since the end of August.  It is the second straight week that mortgage rates have averaged less than 5.0% while remaining at historically low levels.  In the week ending October 12^th, the MBA’s seasonally-adjusted purchase index dropped 5.0% from the previous week and was down 7.32% compared to the same time last year.  Purchase applications were coming off their highest levels since the beginning of the year in the previous week.  Lower rates have spurred mortgage application activity over the past several weeks.

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