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Fed to Continue Bond Buying; Home Prices Rise

Market Digest – Week Ending 8/2

The S&P 500 finished above 1,700 for the first time, adding to a string of recent milestones. The Fed said it would continue its $85 billion monthly bond buying program and provided a more subdued assessment of future economic growth expectations. Q2 GDP growth was reported at 1.7%, exceeding modest expectations. The market was also driven by a strong manufacturing activity report from China. The US labor market sent mixed signals. A decline in the number of workers seeking unemployment benefits was offset by a smaller than expected increase in payrolls. Bonds were down modestly.

Weekly Returns:
S&P 500: 1,710 (+1.1%)
FTSE All-World ex-US: (+0.8%)
US 10 Year Treasury Yield: 2.60% (+0.05%)
Gold: $1,313 (-1.4%)
USD/EUR: $1.328 (+0.0%)

Major Events:

  • Monday – Pending home sales in June were up 10.9%, which was below consensus expectations.
  • Tuesday – The Case-Shiller 20 city index of home prices rose 12.2% in May from a year earlier.
  • Tuesday – Russian potash producer Uralkali said it was pulling out of its sales partnership with Belarus, sending global potash mining stocks down sharply.
  • Wednesday – The Commerce Department reported the economy grew at a 1.7% annual rate in the second quarter, below historic standards but above recent expectations.
  • Wednesday – The Fed said it would continue its $85 billion-a-month bond-buying program and offered no substantive changes in its stance on how long the purchases will continue.
  • Thursday – The official Chinese manufacturing purchasing managers’ index for July came in at 50.3, signaling slight expansion and exceeding consensus estimates.
  • Thursday – NSA information leaker Edward Snowden was granted one year asylum in Russia, which places significant strain on US-Russian relations.
  • Friday – Employers added fewer workers than anticipated in July, but the unemployment rate dropped to 7.4%.

Our Take:
The housing market remains hot, but recent mortgage rate increases are starting to have a cooling impact. This is probably a good thing. We’re only six years removed from the peak of the housing bubble and don’t need another one right away. According to the Case-Shiller indexes, prices in Denver and Dallas are now hitting all-time highs, but the 20 city overall composite remains 24% below its peak. It is important for housing to settle into a pattern of steady, moderate growth in terms of both prices and volumes.

We are optimistic. Home prices remain affordable compared to historical averages. Banks remain tight with credit in the aftermath of the crisis, but are starting to feel increasing pressure to relax standards. Many who were buried in underwater houses now have the flexibility to move. As long as 30 year mortgage rates remain below 5%, housing should be a net contributor to economic growth and help support stock prices.

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