Economic Highlights for the Week Ending July 28th

Monday, July 24th
Fed funds futures traders were pricing in higher odds Monday that the Fed will raise key short term interest rates in August. Odds of a rate hike next month stood at roughly 47% today up from 34% last Friday. Upcoming data central to the interest rate outlook this week are new and existing home sales Tuesday & Thursday and the advance estimate of second quarter GDP on Friday.
Tuesday, July 25th
The slowdown in the housing market continued last month as existing home sales fell 1.3% in June to a seasonally adjusted annual rate of 6.6 million units. The inventory of available homes for sale continues to climb higher under softened demand, rising 3.8% to 3.7 million units which reflect a 6.8 months supply at the current sales pace.
The consumer confidence index rose to 106.5% in July from 105.7% in June. Higher ratings in both index components, expectations and the present situation contributed to July’s gain. While consumers are still fairly positive about jobs and the labor market, gas prices would need to move lower in order for confidence levels to improve further from here.
Wednesday, July 26th
The MBA mortgage applications index fell 1.3% to 533.8% for the week that ended July 21. The purchase index dropped 2.4% on the week while refinancings drifted 0.6% higher. Both home buying and refinancing application volumes continue to trend lower under higher rates. As housing market activity slows so does its contribution to economic growth.
The Fed's round up of economic activity across the twelve Federal Reserve banking districts known as the beige book and compiled in preparation for the FOMC meeting in August, indicated that growth slowed in most parts of the country in June and early July. Manufacturing was strong, residential investment slowed and consumer spending weakened. While high input costs were noted in many areas there was less pass through to retail prices. Labor markets tightened but wage gains do not pose a threat to inflation at this time.
Thursday, July 27th
New orders for durable goods jumped 3.1% in June better than an expected 2.0% gain. June's gain was led by strong demand for transportation equipment especially civilian and military aircraft. Excluding the transportation sector, durable goods orders rose 1.0%. Durable goods orders remain volatile, with hug swings related to aircraft orders, but they are trending higher overall.
New home sales fell 3.0% in June to a seasonally adjusted annual rate of 1.131 million. Moreover, May sales were revised sharply lower from 1.234 million to 1.166 million. New home sales, while still volatile, have been trending lower since peaking last July.
Mortgage rates tumbled this week on signs that the economy may be cooling. Slower economic conditions could help ease inflationary pressures making another Fed rate hike unnecessary. 30-year fixed rate mortgages averaged 6.72% this week compared to 6.80% last week according to Freddie Mac's mortgage market survey.
Friday, July 28th
The economy grew at a 2.5% annual rate in the second quarter, compared to expectations for a 3.1% gain. Growth was boosted by service sector gains but limited by slower consumer spending. GDP gained 3.5% over the past year, in line with longer term averages. Economy wide inflation showed some acceleration with the core index gaining 2.9% in Q2 up from 2.1% in Q1.
The employment cost index rose 0.9% in Q2 after rising 0.6% in Q1. Wage growth is up slightly but offset by a deceleration in benefit costs. Over the past year labor compensation increased a tame 3.0%.

WEEK IN ADVANCE
Modest second quarter growth lowered rate hike expectations. The financial markets are clearly leaning toward a pause in August. One more major piece of data remains before the next FOMC meeting. The employment report showing job growth and hourly earnings due out on Friday is crucial to the Fed's policy decision.

Economic Highlights for the Week Ending July 21, 2006

Monday, July 17th

Rate hike expectations eased last week amid turmoil in the Middle East and surging energy prices. The financial markets expect economic growth to slow significantly during the second half of this year potentially making another rate hike unnecessary. Fed funds futures traders as of last Friday lowered the probability of a 25 bp rate hike in August to roughly 60%. The week ahead provides several events and indicators that should continue to shape the interest rate outlook.

Industrial production jumped 0.8% in June on strong auto and machinery manufacturing. Mining and utilities output also posted solid gains. June capacity utilization also increased to 82.4% from 81.8% in May. Utilization rates were the highest in 6 years and indicate tighter resource usage which could fan inflationary pressures.

Tuesday, July 18th

The producer price index jumped 0.5% in June compared to expectations for a 0.3% gain. Price gains were broad based across most segments. Excluding food and energy prices the core PPI rose 0.2%, in line with expectations. Over the last year core prices rose 1.9%, which is at the upper range of the Fed's comfort zone.
The NAHB housing market index continued to slide in July, dropping to 39 from a reading of 42 in June. Homebuilder optimism is definitely waning as evidenced by lower ratings of both present and future single family home sales. Also, foot traffic through model homes slowed. The sharply lower trend in this index portends of a slowdown in construction of new homes.

Wednesday, July 19th

The consumer price index rose 0.2% in June in line with expectations and related to a decline in energy prices. Excluding food and energy from the index, core consumer prices rose 0.3% last month and are up 2.7% over the past year. Higher than expected gains in the core CPI over the last several months make another Fed rate hike in August a strong likelihood.
The MBA mortgage applications index fell 4.6% to 540.8% for the week that ended July 14. Purchase applications fell 6.2% on the week while refinancings slipped 1.6%. Because of rising interest rates, mortgage application volume has been trending lower and is now 32.5% lower than levels seen last year.
Housing starts fell 5.3% in June to a seasonally adjusted annual rate of 1.85 million units. June's decline was led by a 6.5% drop in new starts of single family homes. Multifamily starts rose modestly.
Chairman Bernanke’s semiannual testimony to Congress today was more dovish than expected by the financial markets. The Fed Chief said that some moderation in economic growth appears to be underway which could help lower inflationary pressures over time. However, inflation has increased somewhat related in part to higher energy and commodity prices but that recent gains are mostly attributable to owners' equivalent rent or higher shelter costs. Slower home purchasing activity can drive up rents which are really more indicative of a slowing housing market than of rising inflation. Fed funds futures traders were pegging chances of another rate hike at 90% following the CPI data today then odds dropped to around 65% after the Chairman's testimony.

Thursday, July 20th

Mortgage interest rates climbed higher this week after easing somewhat in the week prior. 30-year fixed rate mortgages averaged 6.80% this week compared to 6.74% last week according to Freddie Mac's mortgage market survey. Economists at Freddie Mac say that a higher-than-expected reading in core consumer inflation placed upward pressure on mortgage rates this week.
Jobless claims fell 30k to 304k for the week ending July 15. An end to the New Jersey government shutdown accounted for some of the outsized drop in claims this week. Aside from one time factors the level of claims suggests solid labor market conditions.

Friday, July 21st

Stock Market Close for the Week Index Latest A Week Ago Change DJIA
10868.38 10739.35 +129.03 or +1.20%
NASDAQ 2020.39 2037.35 -16.96 or -0.83%

WEEK IN ADVANCE

The economic calendar this week will focus on housing data and economic growth. Along with new and exiting home sales tallies mid-week we will get the first print on Q2 GDP Friday.