The market continued its downward trend this week sparked primarily by economic concerns in China and talk of stricter regulations in the banking industry.  The market is on pace to record its third consecutive day of losses on Friday.  In afternoon trading, the broader S&P 500 index is trading 0.7% lower at 1,109.  The S&P 500 index is currently trading down about 2.4% for the week and if the selling persists, this will be its lowest close since the year began.  In the previous trading session on Thursday, stocks suffered their largest single-day percentage decline since October.

Trends in the banking sector have remained consistent in the past couple of weeks.  While most of the major banks have reported better than expected results with a return to profitability, an uncertain outlook along with talks of banking reform have dragged on financials.  Goldman Sachs was the latest to post better than expected numbers only to see shares sent lower.  President Obama’s recently announced banking regulation proposal, if passed, would limit banks and financial institutions that own banks from participating in “risky” business activity.  Proprietary trading has resulted in both large profits and large losses, and depositors show little concern either way due to being insured by the FDIC.  The President's proposal would prevent these banking entities from owning or investing in hedge funds and private equity funds and impose new limits on a bank’s size and the impact it would have on the overall financial sector.  While reducing risk, it may also make it more difficult for small businesses and start-ups to obtain financing.

Building permits and housing starts moved in opposite directions in December although the data was relatively positive overall.  Unusually cold weather conditions may have caused construction activity to stall in December but a continued surge in building permits suggests that activity will likely pick-up in the coming months.  Total building permits increased to a 14-month high as builders try to capitalize on record-low rates and the homebuyer tax credit which will both likely not exist in the second half of the year.
 
The Economy
Initial unemployment claims posted a sharper than expected rise over the past week to a figure of 482,000.  Claims increased by 36,000 in the week ending January 16th.  This was the largest increase for initial unemployment claims in eight months.  The rise in weekly unemployment claims along with the disappointing December jobs report earlier in the month shows that labor markets are still on shaky ground even as economic growth has resumed.

Leading economic indicators continued to suggest the economy is stabilizing and for growth to continue going into the spring months.  The leading index increased to a reading of 106.40 in December compared which is a 1.2 point gain from the previous month.  This is the ninth consecutive monthly gain for the leading index.  This month’s increase was driven by a drop in initial unemployment claims while building permit activity continued to surge.  Rising stock prices at the end of last year also contributed to the rise in the leading index while helping boost consumer confidence and consumer expectations. 

Housing Market
Housing starts recorded a larger than anticipated drop in December although building permits reported a surprise increase.  Total housing starts fell 4.0% from the previous month to a seasonally-adjusted annual rate of 557,000 units.  Single-family starts fell 6.9% from the previous month while construction on multi-family units increased 12.2%.  Total building permits jumped 10.9% in December to a seasonally-adjusted annual rate of 653,000 units which is its highest levels in 14 months.  Permit issuances for single-family homes rose to a 15-month high, increasing 8.3% to a seasonally-adjusted annual rate of 508,000 units.  Multi-family building permits jumped 20.8% from last month to a seasonally-adjusted annual rate of 145,000 units.

Inclement weather conditions were cited for the drop in construction activity last month.  The recent surge in permit activity suggest that builders are planning to ramp up production in anticipation of an elevated level of demand that may come before the expiration of the homebuyer tax credit.  Homebuyers will need to have a signed sales contract by the end of April and must close no later than the end of June to qualify for the tax credit which should mark the end of the government’s accommodative measures to support the housing market.

National average mortgage rates declined from the previous week to 4.99% in the latest Primary Mortgage Market Survey released weekly by Freddie Mac on January 21st.  This was the third straight week that average fixed rates have declined and the lowest they have been since mid-December.  Rates had been moving higher but have now dropped back under the 5.0% mark again.  In the week ending January 15th, the MBA’s seasonally-adjusted purchase index increased 4.40% from the previous week but was still down 23.91% compared to the same time last year.  This was the third straight weekly increase for the purchase index.  Overall mortgage application activity increased 9.1% over the past week due a jump in refinance activity.  The refinance share of mortgage activity increased slightly over the past week to 71.7%.

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