A Rare View On the last Week : S & P Detail

U.S. Weekly Financial Notes: Slowly We Tread

Markets remained cautious following the June 21-22 meeting of the Federal Open Market Committee (FOMC). Aside from confirming what was largely expected, Chairman Ben Bernanke left observers uneasy after stating that the Fed itself finds the slowdown puzzling and that part of it may be longer lasting. Economic releases this week include:

• May existing home sales fell 3.8% over April to 4.81 million units (annualized). May new home sales slid 2.1% month over month to an annualized 319,000 unit rate.
• The May median existing home sales price rose to $166,500 from $161,100 in April. It is still down 2.9% from a year ago. The median new home price rose 2.6% over April to $222,600, though it's still down 3.4% year over year.
• The FHFA home price index for April was up an annualized 0.8% over March though is down 5.7% over last year. The price index is down 19.3% from its April 2007 peak.
• The S&P/Experian Consumer Credit Default Index fell to 2.23% in May from 2.3% in April and 3.61% the year before.
• The Architecture Billings Index slipped 0.4 point to 47.2 in May. A score above 50 indicates an increase. The inquiries index slipped 2.4 points to 52.6, its lowest reading in 22 months.
• Durable goods orders were up 1.9% month over month in May, partially offsetting April's revised drop of 2.7% (previously down 3.6%).
• The Bureau of Economic Analysis (BEA) upwardly revised its estimate of first-quarter real GDP from 1.8% to a 1.9% annualized rate. It decelerated from the 3.1% pace in the fourth quarter.
• Initial jobless claims rose 9,000 to 429,000 in the week ended June 18. The figure is worse than the 420,000 consensus expected, and it comes after the previous week was upwardly revised to 420,000 from 414,000. The seasonally adjusted insured unemployment rate remains at 2.9% for the third consecutive week.
• Oil prices lost nearly 6% this week, falling to $90/barrel on Friday afternoon after the U.S. tapped reserves. The dollar strengthened against the euro on continued sovereign risk fears.

Not Expecting Much

The FOMC statement was also no surprise. The Fed kept interest rates at close to zero, and it confirmed that it will complete QE2 by the end of this month but will continue to reinvest principal payments. To top it off, the Fed agreed with us. It introduced a gloomier outlook for the U.S. recovery than it thought before. The Fed released its new economic projections, which were much weaker than its April forecast, and as Bernanke said, the revisions were "significant." The Fed cut its GDP growth estimate for 2011 to 2.5%-3.0% from the 2.9%-3.7% forecasted in April. It revised its estimate for 2012 GDP growth down sharply, to 2.2%-4.0% from the 2.9%-4.4% forecasted in April. It also upwardly revised its unemployment rate and pricing forecasts for 2011 and 2012.
But people weren't as interested in the statement. They were all waiting for Chairman Bernanke to tell us something new. His speech pretty much affirmed what was written in the statement. However, the question and answers session was where he rolled up his sleeves and gave us something to think about, or worry about.
For the most part, he was optimistic that the recovery hasn't been derailed, though he indicated that the labor market is a long way from being healed. However, it seems from the statement, new forecast, and speech, that the Fed expects the economy to settle into a disappointing recovery, and that it has done all that it can do, for now. Even more disturbing was Mr. Bernanke's comment that they "don't have a precise read on why this slower pace of growth is persisting," which sounds like the Fed's transitory mantra is running thin.

Still At A Snail's Pace 

US DATA:The ISM manufacturing index, Construction spending,

The ISM manufacturing index fell almost seven points to 53.5 in May, weaker than the consensus expectation of 57.8 though not too surprising given the disappointing reading seen yesterday from the Chicago PMI release. It still remains at more than the 50-point benchmark rate, indicating growth, though it is well below the seven-year high of 61.4 seen in March. The employment index fell to 58.2 from 62.7 in April while new orders plunged more than 10 points to 51.0 in May. The weak reading adds to market concerns that the recovery is starting to falter.

U.S. Construction Spending Rises 0.4% In April

U.S. construction spending rose 0.4% month over month in April but is still 9.3% below the April 2010 figure. The reading was a bit stronger than the 0.3% that markets expected but comes after March was sharply downwardly revised to a 0.4% gain from the 1.4% increase previously reported. February was upwardly revised to a 2.0% drop from a 2.4% drop previously, which is still not enough to counter the revised March drop. Residential construction spending jumped 3.1% in April after a downwardly revised 0.8% decline in March (previously up 2.6%). Residential spending is down 12% over last year. Nonresidential construction spending edged down 0.8% in April and remains down 8.0% over last year. Overall public sector spending was down 1.9% in April, which the 1.7% gain in private spending only partially offset. 

The soft construction spending report  adds to market worries.

The Overall Drops In The S&P/Case-Shiller Monthly Home Price Indices Slowed In March, But 12 Cities Hit New Lows

U.S. home price declines slowed in March 2011 according to the S&P/Case-Shiller Home Price Indices. While the month marks the eighth consecutive month of declines for U.S. home prices on a nonseasonally adjusted basis, the monthly decline was slower in March than a month earlier. The nonseasonally adjusted 20-City S&P/Case-Shiller home price index fell 0.8% in March. This is a slight improvement from 1.1% drops each in January and February. However, the same index has dropped 7.2% since July 2010 and 3.6% from March 2010. The composite index is currently at about the same level as in early-to-mid-2003, and several regional home price indices have been posting new lows in recent months. In fact, 12 regions out of 20 are facing new lows since the mid-2006 peak, and 13 regions are currently below their early 2009 lows.

In addition, the S&P/Case-Shiller Quarterly National Index dropped 4.2% in first-quarter 2011 and 5.1% during the last four quarters. The National Index is near its mid-2002 levels. This quarterly index covers single-family home prices for the nine U.S. Census Divisions and is reported quarterly.

We believe the declines in the home price indices reflect poorly on the U.S. housing market, as well as the performance of the underlying collateral in U.S. residential mortgage-backed securities. In addition, the amount of shadow inventory (or, the outstanding properties whose borrowers are or recently were 90 days or more delinquent on their mortgage payments, properties currently or recently in foreclosure, or properties that are real estate owned), slowly improving existing home sales, and the high unemployment rate will continue to slow down the housing market recovery in our view. We expect U.S. home prices will remain weak and could decline up to an additional 5% below their early 2009 lows this year as sales slowly begin to improve through the spring.

Key Highlights

• The 10- and 20-City seasonally unadjusted S&P/Case-Shiller Home Price Indices declined 2.9% and 3.6% on a year-over-year basis, and declined 0.6% and 0.8%, respectively, in March alone.
• On a monthly basis, home prices declined in March in 18 out of 20 metro areas (all but Washington, D.C. and Seattle), and the drop was less than or equal to 1% for 10 regions on a seasonally unadjusted basis. According to the S&P/Case-Shiller index, home prices in Atlanta, Chicago, Boston, Detroit, Minneapolis, Charlotte, N.C., Las Vegas, and Cleveland decreased more than 1% on a seasonally unadjusted basis in March. Overall, Minneapolis (3.7%) declined the most during the month.
• On a year-on-year basis, home prices declined in 19 out of 20 metro areas in March. Washington, D.C. was up 4.3% from a year earlier. The largest year-on-year declines were in Minneapolis (10.0%) and Phoenix (8.4%).
• Home price indices in 12 metro areas posted new lows in March since reaching their mid-2006 peak.
• The values of the S&P/Case-Shiller 10- and 20-City composite indices are currently near their early-to-mid-2003 levels. These indices peaked around mid-2006 and have since lost about 32.6% and 33.1% of their values, respectively. Both indices currently remain near their early 2009 lows. However, the 20-City index fell slightly below its 2009 bottom in March 2011, hitting a new low.
• Home prices in Detroit are 32.9% below their 2000 levels, and home prices in Atlanta, Cleveland, and Las Vegas are slightly below their 2000 levels.
• All this confirming the not so note worthy success of FED programe ( QE2 ) and the using the same Tools to usher the Ailing Economy