New Home Sales (December 2011)
-New Home Sales for December were 307,000 (seasonally adjusted, annualized)
-Previous was 315,000. Consensus was 320,000
-Down 2.2% since November, Down 7.3% since December 2010
-Average sale price $266,000
-Estimated 302,000 new homes were sold in 2011, down 6.2% below the 2010 figure of 323,000
-Full report
-No surprise here – this is still weak.

Leading Economic Indicators
-Leading Indicators, Month/Month change +0.4%.

Forget the data here. What is notable is that money supply has been removed from LEI. This goes hand-in-hand with yesterday’s FOMC announcement that short-term rates would stay where they are for at least 2 more years. This is an admission that monetary policy has been ineffective as a stimulation force on the economy. That is, to me, an astonishing admission.

Durable Goods Orders (December 2011)
-New Orders, Month/Month 3.0%
-Ex-transportation, Month/Month +2.1%
-This is indicative of continued growth in manufacturing.

Chicago Fed Index of National Activity
-Index level was +0.17 for December

Kansas City Fed Regional Manufacturing Index
-Level was +7 for December

GDP
I want to correct what I wrote yesterday about the forecast for GDP. The Consumer Metrics index spiked in June-July. Since this seems to lead GDP by three month this indicates a fairly strong (3.5% or more) increase in 4Q2011 GDP. The subsequent slide down in the Consumer Metrics Index indicates a weak 1Q2012.

Retail
-ICSC-Goldman Chain Store Sales, Week/Week -1.4 %
-ICSC-Goldman Chain Store Sales, Year/Year +2.8 %. Previous was +3.0%
-Redbook Chain Store Sales Year/Year +2.5%. Previous was +2.8%

This year is not starting well. The Consumer Metrics Absolute Demand Index (this measures online discretionary spending) remains soft. It moved upward nicely last June-July giving hope that the consumer would lead the way to GDP growth but the index has waned since then. The question is just how well this index forecasts GDP. If the Consumer Metrics Index is an accurate forecast of GDP then 4Q2011 will report worse than anticipated.

It appears today as a debt crisis. More than that, it is a growth crisis. Behind the growth crisis is a leadership crisis.

Strauss-Kahn resigned as head of the IMF after charges, later dropped, that he raped a hotel maid in May.

More of his comments in full story on Financial Times via BusinessInsider.

Like him or not, Strauss-Kahn’s view is hard to disagree with as Europe’s slog continues.

Markets were optimistic Friday 12/9 following an EU summit that promised more centralized budget controls and more pressure on member nations to balance budgets.

But sentiment reversed last week as the IMF said Greece was shirking its promises to reform economic policy and cut government spending.

Also IMF managing director Christine Lagarde said Europe’s crisis is escalating, and deputy assistant Treasury secretary Mark Sobel told congress about U.S. economic risks stemming from Europe.

Then Fitch became the third major ratings agency to downgrade several large banks on European contagion concerns, plus they issued a negative outlook on France.

And today markets were rattled when European Central Bank president Mario Draghi implied a Euro breakup costs way more than staying together, and said that the ECB can’t step up bond buying.

It all led investors toward safe bets like U.S. mortgage bonds and Treasuries, which helps U.S. rates.

Below I recap last week, then preview what’s coming. And please note: you can see if you qualify now for HARP II, the new refi plan for underwater homeowners, but loans won’t be made until November 15 at the earliest.

RECAP OCTOBER 24-28 MARKET WEEK
Home Prices: Case Shiller’s reported home prices rose 0.2% July to August, the fifth straight monthly gain but a tiny gain. Prices are down 3.8% since August 2010 and stuck at 2003 levels. So: Is owning a home smart?

GDP: The first of three 3Q2011 GDP readings showed the economy grew at 2.5%, compared to 1.3% for 2Q and 0.4% for 1Q.

Europe Debt Deal: Rates rose Thursday on news of the EU debt deal but reversed Friday as skepticism grows. Next week’s preview below.

Consumer inflation: The Fed’s preferred measure of consumer inflation, the Personal Consumption Expenditures Index (PCE), was within their 2% annual cap. They focus on ‘Core’ which excludes food and energy prices. From Sept 2010 to Sept 2011, all-inclusive PCE was 2.9% and Core was 1.6%. Inflation ok for now.

PREVIEW OCTOBER 31 – NOVEMBER 4 MARKET WEEK
Here are next week’s economic calendar highlights with rate impacts:

Manufacturing: Tuesday is the Institute for Supply Management October manufacturing report. September was 51.6 with 50 as dividing line between expansion and contraction. Good news: 26th months of growth. Bad news: barely growing. Also, manufacturing is weak as measured by two other October surveys: Philly Fed (PA) was 8.7, up from September’s -17.5, the first positive in 3 months. Empire State (NY) was -8.48, fifth straight monthly contraction. For PA/NY surveys, 0 is line between growth/contraction. ISM shouldn’t be a blowout number so rates even.

Fed AND European Central Bank Meetings: The Fed’s meets two days with a policy announcement Wednesday. Rates dropped after their September 21 meeting because they recommitted to mortgage bond buying (not QE!). The Fed is unlikely to surprise markets, but Thursday’s European Central Bank meeting is huge: the first with new ECB President Mario Draghi (bio). His stance on ECB policy and EU debt crisis is key. Rates even to down on Fed meeting. Rates are wild card for ECB meeting.

Jobs Report: Markets expect Friday’s jobs report to show 88k-100k new jobs created in October and unemployment to hold at 9.1%. The economy added 103k new jobs in September, plus August was revised from zero to 57,000 jobs created, and July was revised from 85k to 127k. I think this one will be close to consensus. If so, rates even.

Europe Debt Crisis: Besides Thursday’s ECB meeting, there’s a G20 Summit Thursday and Friday. Both may elaborate on last week’s debt deal, which helped stocks and hurt rates. Another wild card for rates.

Corporate Earnings: Another big earnings week including reports from Pfizer, Kraft, Nissan, Honda, Comcast, Clorox, Mastercard, AIG, Unilever, Credit Suisse, Anadarko, Time Warner, News Corp, Sony, LinkedIn.

Technical Trading Factors: Last Thursday, the S&P 500 broke clearly above it’s 200 day moving average of 1274 for the first time since August 2, and closed at 1285 Friday. Also Thursday, mortgage bonds—namely the 3.5% Fannie Mae coupon most lenders use to price consumer rate sheets—dropped clearly below the 50 day moving average they were hugging since October 7. Mortgage bonds regained much of Thursday’s sharp post-EU news losses Friday, but they’re still below the 50 day moving average.

Bottom Line For Rates: These technical factors suggest stocks and rates could start the week stable, but volatility will remain extreme as politicians and central banks hog center stage. Also the 10yr Note yield, a key benchmark for rate markets, has risen enough (now 2.32%) to create upside rate rate risk near-term. Long-term, a rate spike isn’t warranted by weak global economic conditions. But next week is key to determine whether rates rise near-term or hold this volatile-but-steady range we’ve been in since October 7, which is .25% above record lows.
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Rate Shopper Must-Read:
How To Shop For A Mortgage

Draghi, 64, has been governor of the Bank of Italy since December 2005.

He was vice chairman of Goldman Sachs International and part of the firmwide management committee 2002-2005.

He was director general of the Italian Treasury 1991-2001.

He was executive an director of the World Bank 1984-1990.

He was an economics professor at the University of Florence 1981-1991.

He received his economics PhD from MIT in 1976 (note: Ben Bernanke received his economics PhD from MIT in 1979).
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Further reference:
-Can Super Mario Save The Day For Europe?
-Mario Draghi: Hawk For Whom?
-Who Is Mario Draghi?
-Draghi Bank of Italy bio
-Draghi on Wikipedia

-Q4 Monetary Policy Preview: US, Europe, UK, Japan (TradingFloor)
-Can The S&P 500 Stay Above 1175-1195 Resistance? (TheBigPicture)
-Moneyball Housing Analogy: Runs = # of Sales (Matrix)
-Top 10 Ben & Jerry’s Wall Street Flavors (ReformedBroker)
-Mortgage Lenders Get More Into Borrowers’ Pasts (InmanNews)
-6 Reasons Mortgage Apps Are Rejected (InmanNews)

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Further reference:
How The Fed’s Latest Plan Lowers Mortgage Rates

Bernanke’s economic outlook yesterday showed concern about the problems in Europe and market uncertainty, and he urged policy action to support the housing market and encouraged Congress to come up with a long-run plan for fiscal responsibility – nothing too dramatic. But he feels that stabilization in the housing market is crucial to the economic recovery, and that Congress should focus on policies to support housing such as managing REO overhand, facilitating refinancing for underwater borrowers, stabilizing distressed neighborhoods, and suggesting a clear path for the future of the mortgage finance system. Good luck with that one ahead of next November.

By the end of yesterday Treasury rates were nearly unchanged from Monday’s closing levels, with the 10-yr at 1.78%. Originator selling picked up with supply totaling between $2 and $3 billion, higher than average over the last 30 days per Tradeweb, which pushed MBS prices down about .375.

Overnight Italy’s credit rating was cut by Moody’s for the first time in almost two decades on concern that chronically weak growth will make it difficult to reduce the region’s second-largest debt while fallout from the region’s debt crisis boosts financing costs. Do you think so? Moody’s lowered Italy’s rating three levels to A2 from Aa2, with a negative outlook.

The ADP numbers came out this morning. Small business service providing companies contributed nearly 2/3 of the jobs – and the basic ADP number showed a pickup of 91k, a little stronger than expected. Later we have an ISM Non-Manufacturing number.

This morning the 10-yr is up to 1.84% and MBS prices are worse by about .250.

Consumer mortgage rates are up about .125% to .25% since Monday as mortgage bonds trade wildly. The big picture still supports low rates, but the volatility won’t stop as markets sort through the issues.

Here’s how to shop for a mortgage in this environment.

Chicago PMI
-ISM – Chicago Business Barometer Index was 60.4. Previous was 56.5. Consensus was 55.4.

UMichigan Consumer Sentiment
- Index was 59.4
- Previous was 57.8
- Consensus was 57.8
-This datum over 50 implied expansion but is inconsistent the Conference Board’s Consumer Confidence released Tuesday which shows a smaller gain and an index under 50 implying contraction. I am guessing that one of them is correct.

Money Supply
-Yesterday’ Fed M2 Money Supply Report showed a $14.9 billion contracion in M2.
-The H.6 Fed report shows excess banking reserves of $1,548,799,000,000.