Vital Signs for the Week of June 21


The housing market may finally be cresting. Interest rate tightening is just around the corner. The Federal Reserve's Open Market Committee meets on June 29 and 30 and a quarter-point rate hike is widely expected. Mortgage rates are already approaching 6.5%, after falling below 5.5% earlier this year. Once the Fed starts to tighten, further increases in mortgage loan rates are inevitable.

Of course, the housing market is very sensitive to movements in rates. Low rates are a huge reason why the sector turned in record performances so far this millennium. The combined sales of new and existing homes have established new highs in each of the past three years, hitting 7.19 million in 2003. Over the same period, the Fed pared the fed funds rate down to a decades-low 1%.

The market for refinancing a home is already drying up. Applications for refinancing have fallen 70% since peaking in March.

There may a couple really strong housing numbers yet to come. The latest figures on new residential construction showed a big 3.5% pop in housing permits over May. However, it could be homebuilders and purchasers were rushing to get permits in an effort to lock in a good rate. If that's the case, then a slowdown is likely in coming months.

Indeed, the May consumer sentiment report from the University of Michigan appears to confirm this trend. "More consumers in the May 2004 survey cited the advantage of obtaining a mortgage in advance of any additional increases in interest rates than any other time in nearly ten years," wrote survey director Richard T. Curtin.

A similar pattern could be expected in new and existing home sales. In fact, March new home sales hit a record annual rate of 1.24 million and promptly fell 11.8% in April, to a rate of 1.09 million. Economists surveyed by Action Economics do see sales inching up in May, but the consensus forecast for existing home sales is for a 2% fall, to a pace of 6.5 million.

Of course, many economy watchers believed housing would run out of steam at the start of 2004, only to be proven wrong. The National Assoc. of Realtors still believes existing home sales will hit 6.17 million this year, yet another record high.

So far, combined new and existing home sales are currently on a record pace of 7.48 million. And as rates rise, there will be some support from the rest of the economy. Healthier economic growth has finally led to job gains. That means personal income will rise, helping to partially offset the effect of interest rates. One can't write off housing just yet, but the interest-rate headwinds appear ready to finally slow down the housing sector.

Here's this weeks economic calendar.

MEETING OF NOTE

Sunday-Thursday, June 20-24

The Telecommunications Industry Assoc. and the U.S. Telecom Assoc. host the Supercomm 2004 conference in Chicago. Federal Communications Commission Chairman Michael Powell, Siemens President and CEO Eve Aretakis, Time Warner Media and Communications Group Chairman Don Logan, and others will speak during the conference.

MEETING OF NOTE

Monday, June 21, 1 p.m. EDT

Federal Reserve Board Governor Ben S. Bernanke speaks about the euro at a conference in Paris.

EARNINGS REPORTS

Walgreen, Apogee Enterprises, and more.

MEETINGS OF NOTE

Tuesday, June 22, 10 a.m. EDT

Federal Reserve Board Governor Donald Kohn testifies before the Senate Banking Committee in Washington, D.C. about regulatory reform.

11 a.m. EDT

Federal Reserve Bank of Philadelphia President Anthony Santomero speaks on the "Role of Education in Development" at the National Commission for Cooperative Education Corporate Symposium in Philadelphia.

3 p.m. EDT

Federal Reserve Board Governor Susan Schmidt Bies speaks at a finance and accounting forum in Washington D.C. about the financial services industry.

EARNINGS REPORTS

Darden Restaurants, Goldman Sachs Group, Kroger, Morgan Stanley, Stride Rite, 3Com, and more.

ICSC-UBS STORE SALES

Tuesday, June 22, 7:45 a.m. EDT

This weekly tracking of retail sales, assembled by the International Council of Shopping Centers and UBS bank, will update buying activity for the week ending June 19. In the week ended June 12, seasonally adjusted sales rose by 0.2% for a second straight week, following two straight weekly declines of 0.5%.

INSTINET REDBOOK RESEARCH STORE SALES

Tuesday, June 22, 8:55 a.m. EDT

This weekly measure of retail activity will report on sales for the second fiscal week of June, ended June 19. In the second fiscal week of June, sales were up 0.5% compared with the same period in May. In the full month of May, sales stood 0.5% higher when compared with April.

MORTGAGE APPLICATIONS

Wednesday, June 23, 7 a.m. EDT

The Mortgage Bankers Assoc. releases its tally of mortgage applications for both home buying and refinancing for the week ending June 18. In the week ended June 11, the purchase index bounced back up to 449.5, from 432.2 in the previous period, but held below the 459.8 posted for May 28. The latest reading of the four-week moving average eased to 447.8, from 449 for the week ended June 4.

The average rate on a conventional 30-year mortgage, according to HSH Assoc., nudged up to 6.42% for the week of June 11, from 6.41% in the prior week.

The refi index also rose, after five straight weekly declines. In the week ended June 11, the index stood at 1479.4, after sliding to 1363.2 in the previous period, from 1583.6 for the week ended May 28. The refi index four-week moving average dropped to 1530.3, from 1614.7 for the week ended June 4. The four-week moving average has fallen by 25% over the past month.

EARNINGS REPORTS

Bed Bath & Beyond, FedEx, Micron Technology, and more.

MEETING OF NOTE

Thursday, June 24, 9 a.m. EDT

Federal Reserve Board Governor Edward Gramlich discusses ways to reduce budget deficits at a Concord Coalition conference in Washington, D.C.

EARNINGS REPORTS

Apollo Group, A.G. Edwards, Del Monte Foods, Family Dollar Stores, Paychex, Nike, Rite Aid, Tektronix, and more.

JOBLESS CLAIMS

Thursday, June 24, 8:30 a.m. EDT

First-time claims for jobless benefits for the week ended June 19 probably inched up to 338,000, according to the consensus forecast of economists surveyed by Action Economics. Jobless claims slowed to 336,000 for the week ended June 12, after an unexpected bump up to 351,000 in the prior period, from 341,000 for the week ended May 29. The unexpected pop in jobless claims in the June 5 week was attributed to seasonal adjustment difficulties related to the Memorial Day holiday. However, the latest reading may have been effected by the closing of government offices on June 11.

The four-week moving average declined to 343,300, from 346,000 in the week ended May 5. Also during the week of May 5, continuing jobless stood at 2.9 million, up slightly from a three-year low of 2.86 million set during the previous week.

DURABLE GOODS ORDERS

Thursday, June 24, 8:30 a.m. EDT

New orders received by manufacturers of durable goods probably picked up by 1.7%. That's the median forecast of economists surveyed by Action Economics. The expected gain for May follows on the heels of a 3.2% drop in April.

However, the April slide appears to have been a breather. In March, orders shot up 5.9% after a 3.9% gain in February. Based on the May forecast, orders would be up 15.6% from a year ago and on pace to grow by an annualized pace of 10.7% in the second quarter.

NEW RESIDENTIAL SALES

Thursday, June 24, 10 a.m. EDT

New single-family homes sold in May are forecast to have moved up to an annual rate of 1.12 million units, say economists surveyed by Action Economics. During April, home sales slipped to a pace of 1.09 million, from the record annual rate of 1.24 million in March.

Investors and economists expect the Federal Reserve will begin raising interest rates on June 30. So far, such expectations haven't had a large impact on the rate-sensitive home buying market. That's especially true for new homes. In May, new housing starts eased, yet housing construction permits soared to their highest level in over 30 years.

HELP WANTED ADS

Thursday, June 24, 10 a.m. EDT

The Conference Board releases its May index of help-wanted ads, based on ads culled from major newspapers across the nation. In April, the index slipped back down to 38, from 39 in March, and 40 in February. The April reading was up one point from a year ago. On a more positive note, the proportion of markets tracked with a rising want-ad volume rebounded to 43%, after sliding to 22% in March, from 63% in February.

Over the past year, the headline index number has bounced around between 35 and 40 points. The index also stalled out following the previous recession in the early 90s. Similar to the latest economic recovery, the labor market lagged the pickup in growth.

However, there are some reasons to believe that the help-wanted index may not may be losing some of its sensitivity to changes in the labor market. Newspapers face greater competition from the Internet, which could distort the index. That effect depends on any overall decline by businesses in using want-ads, as well the mix of new jobs now being created relative to the typical industries that announce openings via newspaper want-ads.

GROSS DOMESTIC PRODUCT

Friday, June 25, 8:30 a.m. EDT

The final look at economic growth for the first quarter of 2004, measured by real gross domestic product, is expected to show the economy expanded by a seasonally adjusted annual rate 4.4%. That's according to economists queried by Action Economics. The forecast level is unchanged from the upwardly revised preliminary report released in May. The initial estimate of first-quarter growth was 4.2%. In the fourth quarter, the economy expanded by 4.1%, after an 8.2% jump in the third quarter of 2003.

The key to above-trend economic growth for 2004 may very well rest with businesses. As companies feel more confident and demand remains strong, businesses will accelerate investment and hiring, as well as rebuild inventories. Just how much investment and inventory stockpiling will be satisfied with imports is very important.

Another significant impetus for increased corporate investment during the year is the accelerated depreciation measure that's set to sunset at the end of 2004. Companies are taking advantage of a rule that allows them to immediately write-off an extra 50% of the value of new equipment put in place before the end of 2004. That will be a positive for growth this year. At the same time, it could be stealing potential growth away from 2005.

CONSUMER SENTIMENT INDEX

Friday, June 25, 9:45 a.m. EDT

The University of Michigan's Survey Research Center will report its final index reading of consumer sentiment for June. Economists surveyed by Action Economics expect the final reading to remain virtually unchanged at 95.1. The preliminary June reading rebounded to 95.2, from the final level of 90.2 in May, and 94.2 in April.

In the final May report, the University of Michigan said consumers were skittish about inflation and interest rates. The fear is that the combination of the two will weaken households' financial positions. However, the mid-month result may be showing that an improving labor market is now overriding other concerns.

EXISTING HOME SALES

Friday, June 25, 10 a.m. EDT

Existing home sales during May probably eased to an annual rate of 6.5 million, according to the median forecast of economists surveyed by Action Economics. In April, sales jumped to a rate of 6.64 million, from a 6.48 million pace in March. Including the April forecast, existing home sales are still on track for another record year of sales, at 6.13 million. Sales hit a record 6.1 million last year.

MEETINGS OF NOTE

Saturday, June 26

U.S. President George W. Bush attends a U.S. - EU Summit in County Clare, Ireland. Iraq and foreign trade are expected to be among the main issues discussed.

Saturday-Sunday, June 26-27

U.S. President Bush meets with Turkish Prime Minister Recep Tayyip Erdogan in Ankara, Turkey and then attends the North Atlantic Treaty Organization's annual summit of heads of state in Istanbul. The NATO meeting will include new members from Eastern Europe and topics of discussion are likely to include Iraq and Russia. By James Mehring


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