THE BASIS POINT

Recap Jan 17-20, Preview Jan 23-27

RECAP JANUARY 17-20 MARKET WEEK

Homebuilder Confidence Inching Up: January’s homebuilder confidence index was 25, the fourth straight monthly gain and highest since June 2007. But still a long shot from 50+ mark that signals a healthy market—hasn’t hit that level since April 2006. Here’s how it looks 1985-Present.

Home Construction Drops, But Single Family Homes Resilient: Housing Starts (aka new construction) dropped and Building Permits were flat for December. Starts were down 4.1% to 657k (seasonally adjusted, annualized). Still below 1.5m needed to keep in line with population growth and scrappage, but Single Family Starts were up 4.4% to 470k, the highest in 2011 and since April 2010 when homebuyer tax credit boosted production. The more volatile Multi-Family Starts were down 13% to 187k. As for Building Permits, they were barely up: 0.1% to 679k, but still holding to highest levels since March 2010.

Existing Home Sales 11-Month High: December existing home sales hit their highest market in 11 months at 4.61m annualized. This is up 5% in December and up 3.6% since December 2010. For all of 2011, existing home sales rose 1.7% to 4.26m from 4.19m in 2010. Unsold inventory dropped to 2.38m, which is a 6.2 month supply, the lowest level in 7 years. But cancelled deals remain high: 33% of Realtors reported at least one cancelled contract in December, same for previous two months, up sharply from 18% in September and August, and up from 9% in December 2010. Buyers still very jittery, plus loans and appraisals are tough.

Manufacturing Better Again: Two key January U.S. manufacturing reports showed a consistent (but modest) up-trend, and both have 0 as dividing line between expansion/contraction. Empire State Manufacturing was 13.48, highest since May 2011 and third straight monthly gain. Philly Fed was 7.3, down from a from a revised 6.8 in December (was 10.3). But even with revision down for December, the January figure still marks a fourth straight monthly gain.

Inflation Still Flat: Flat producer (PPI) and consumer (CPI) inflation continues. December’s annual PPI was 4.8% total and 3.0% excluding food and energy. Annual CPI was 3.0% total and 2.2% excluding food and energy. All December annual (and monthly) figures were flat or down vs. November. There’s little near-term inflation fear which keeps rates low for now.

Jobless Claims Fall Sharply: For the week ended January 14, claims for unemployment insurance dove 50k to 352k. This was the biggest weekly drop since September 24, 2005, and the lowest reading since March 2008. The 4-week moving average is at 379k, also below 400k, a threshold under which the job market may be improving. This is a good trend, but this report doesn’t count jobs added. The job market is still weak despite a decent run for claims. Next report Thursday 1/26.

PREVIEW JANUARY 23-27 MARKET WEEK

Next week’s economic calendar starts slow then picks up steam Wednesday. Plus it’s another big earnings week, and Greece’s debt deal will be top of mind for traders. Highlights below with rate impacts.

First Fed Rate Decision of 2012: There’s two camps on Wednesday’s first Fed rate decision of 2012: those who say we’ll get a QE3 signal, and those who say we won’t. I’m in the latter. I think the Fed confirms their three current strategies: overnight bank-to-bank Fed Funds Rate targeted at 0 to .25%, a continuation of Operation Twist to shift debt holdings from shorter into longer durations, and a ongoing reinvestment of proceeds from their existing mortgage bond holdings into new mortgage bonds, which helps keep mortgage rates low (here’s how). The U.S. economy has been improving enough to have them hold on explicit QE3 signals. This could hurt stocks, and also hurt rates as bonds sell slightly.

STAT OF THE WEEK-Pending Home Sales: December’s Pending Home Sales are Wednesday and estimates call for -3%. Stark contrast from a huge November: New purchase contracts to buy existing homes were up 7.3% in November and up 5.9% since November 2010. At 100.1, this NAR pending home sales index was the highest in 19 months. April 2010 was last time index was higher (111.5) as buyers rushed in to get federal homebuyer tax credits. Very strong report but 33% of realtors reported cancelled deals on existing home sales October through December, and this pending home sales report is a leading indicator of existing home sales expected to close in 60 days. As noted above, December Existing Home sales were better and didn’t reflect these cancelled contracts yet, so maybe pending home sales will. Rates would only rise if it was another upside blowout.

Will 2011 Be Worst New Home Sales Year Ever?: December’s New Home Sales are Thursday and estimates call for 310k-320k. November’s new home sales were 315k (annualized), 1.6% better than October, 9.8% better than year ago. This was the best since April, but well below the 700k needed for a healthy market, and 2011 looks to be the worst year ever for new home sales—we’ll also get the full 2011 number Thursday. Average November new home sale price: $242,900. Rates would rise if it was a big positive surprise but that’s unlikely.

Home Prices: Speaking of home prices, we’ll get the Federal Housing Finance Agency’s (FHFA) November home price report Wednesday, and find out if the -0.2% figure from October will continue or turn positive. But this report isn’t as widely followed—nor does it impact rates—because it’s only for homes with Fannie/Freddie mortgages, so doesn’t include a broad enough sample as home price reports from Case Shiller and CoreLogic.

Fourth Quarter GDP: The first of three GDP readings for 4Q2011 is Thursday and estimates call for 3% to 3.2%. The third and final 3Q reading was 1.8% after being cut twice: second reading was 2%, first reading was 2.5%. This was a common pattern for 2011 GDP. But if we’re at the high side of estimates, rates would get worse as bonds sell on the initially positive perception.

Europe’s Hottest Topics: There are two main Europe topics impacting global markets next week: (1) Greece’s months-long negotiations with private bond investors that involve exchanging outstanding bonds for new ones and taking a 50% or greater losses. Losses more than 50% could cause investors to sue, which could trigger credit default swaps, then banks come under pressure, then we’d have a European bank liquidity issue, which is really a global issue—U.S. rates would drop in this scenario. (2) Besides short-term debt auctions in 5 Eurozone countries next week, the Netherlands and Germany have 30yr debt auctions Tuesday and Wednesday. These longer auctions are important to test appetite for European debt—U.S. rates would also drop if European demand is weak.

Earnings Highlights: There are about 119 S&P 500 companies reporting 4Q earnings this week including lots of companies that give us a feel for consumer strength: Apple, Johnson and Johnson, McDonald’s, Verizon, Travelers, Coach, Yahoo, AMD, ConocoPhillips, ETrade, Netflix, Delta Airlines, Nokia, Colgate-Palmolive, United Continental, JetBlue, Starbucks, Time Warner Cable, Under Armour, Eastman Kodak, Ford, Procter and Gamble, Altria, Chevron.

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