Economic news was mixed Wednesday, but crude prices set new record highs once again, sending stocks lower. Productivity and costs data were better than expected, but pending home sales continue to fall. Even crude inventory levels were stronger than expected, yet oil prices continued to surge. There are concerns about inflation and the housing sector as evidenced by several Fed speeches.

The housing sector continues to show weakness with very little optimism in the sector. However, one slice of positive news came from the weekly mortgage applications report for the week ending May 2. Applications rose a sharp 12 percent during the week to a level of 381.3. The main reason for the gain was a rise of 19 percent in the refi index. Mortgage rates fell during the week to 5.91 percent for a 30-year fixed rate. Though positive, this has had little effect on the view that the housing sector is still in dire straits.

The National Association of Realtors announced this morning that pending home sales fell 1.0 percent in March, putting the year on year decline at 20.1 percent.
Existing home sales fell 19.3 percent during March with new home sales down 37 percent. At least there was some positive news within the data with the Northeast region of the country reporting a 12.5 percent gain. The NAR noted that strict lending practices are leaving demand light, making it difficult for home builders to get rid of excess inventories.

Nonfarm productivity rose 2.2 percent in the first quarter, which was half a percent higher than anticipated. At the same time, unit labor costs rose 2.2 percent as well, but this was 4-tenths below estimates. This news does bode well for those concerned about inflation. In the past year, productivity is up 3.2 percent, 3-tenths higher than in Q407. This report does show that the Fed is on the right track in their view that the slowdown in the economy will lower pricing pressures. However, a drop in hours worked by 1.8 percent leaves concerns about a recession.

Crude prices remain a focus and this has kept stocks down this week. On Wednesday, oil prices closed at a price of $123.53, a gain of $1.69. This is another record high for crude, putting the four-session gain at more than 10 percent. Ironically, crude inventory levels for the week ending May 2 rose by 5.7 million barrels with gasoline reserves up 0.9 million barrels. Inventory levels remain above average, up 7.6 percent year on year, with demand up a meager 0.3 percent.

Federal Reserve Board Governor Randall Kroszner stated this morning that something needs to be done to mitigate recent gains in mortgage foreclosures. He suggested that lenders need to do what they can to work with consumers on various options that will keep foreclosures down. On Tuesday, reassuring words from Fannie Mae (FNM) helped provide some hope in the credit markets. FNM leaders said that the worst of the credit squeeze is may be over.

Thursday’s calendar shows chain store sales data on tap, along with jobless claims and wholesale trade. News from the ECB and BOE will also be released with traders interested in whether these two central banks cut rates.


Jody Osborne
Senior Staff Writer & Options Strategist

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