Economic Highlights for the Week Ending September 29, 2006

Monday, September 25th
Existing home sales fell last month but not as quickly as economists and analysts expected. True, home sales have declined in 10 of the last 12 months however they remain quite strong with this year projected to land somewhere near the third highest on record. For August, existing home sales fell 0.5% to an annualized pace of 6.30 million.
The Fed's work may be done, that is work related to tightening monetary policy. Fed funds futures traders are actually pricing in small odds of a rate cut perhaps as early as next year.
Tuesday, September 26th
Consumers are feeling a little bit better this month probably due to falling gas prices. The consumer confidence index gained 4.3 points in September to 104.5%, better than expected. Consumers rated both the present situation and expectations for the future higher. Going forward, economists anticipate confidence levels to remain range bound with the weakening housing market the primary downside risk.
Wednesday, September 27th
New orders for durable goods defined as big ticket items meant to last three years or more fell 0.5% in August, compared to expectations for a 0.5% increase. Moreover the previous month's decline was revised sharply lower. August weakness was led by a large drop in civilian aircraft, computers and electronic equipment. Excluding the volatile transportation sector however, durable goods orders continue to trend modestly higher.
New home sales rebounded in August gaining 4.1% to an annual rate of 1.050 million, in line with estimates. The bounce was related to sharp downward revisions in the previous three months making August sales tallies seem stronger. New home sales peaked in July of last year and have been trending lower since. Over the past year new home sales have declined 17.4%.
The MBA mortgage applications index fell 4.9% to 566.5% for the week that ended September 22. Both purchase and refinancing activity declined last week. Mortgage activity is expected to stabilize in coming weeks related to steadier rates.
Thursday, September 28th
Second quarter GDP was downwardly revised to a 2.6% annual rate from the 2.9% in the preliminary estimate. This was the final revision for GDP and the weaker pace of growth is consistent with higher interest rates. Economy wide inflation remained unchanged in the final revision at 3.3%.
Jobless claims fell 6k to 316k for the week that ended September 23. Claims have been range bound in the last year and remain at a level that is consistent with fewer layoffs but not much hiring. Payroll growth for September is expected to be moderate again when data is released a week from Friday.
Mortgage rates fell again this week as rate cut expectations increased on incoming economic data. 30-year fixed rate mortgages averaged 6.31% this week compared to 6.40% last week according to Freddie Mac's mortgage market survey. Economists at Freddie Mac note that lower mortgage rates and moderate house price declines should lead to greater housing affordability.
Friday, September 29th
Personal income rose 0.3% in August, matching expectations. Incomes growth gained 9.4% over the past year boosted by a strong 7.7% annual gain in wages and salaries. Consumer spending gained just 0.1% last month due to retreating auto sales. Spending is 6.0% higher year over year. A closely watched inflation gauge the core PCE deflator was up 0.2% on the month and 2.5% on the year.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 11679.07 11508.10 +170.97 or +1.48%
NASDAQ 2258.43 2218.93 +39.50 or +1.78%

WEEK IN ADVANCE
Rate cut expectations increased significantly this week. Incoming data need to be on the weak side for rate cuts to materialize early next year. Friday's employment report figures prominently on the calendar.

Economic Highlights for the Week Ending September 22, 2006

Monday, September 18th
The NAHB housing market index fell to 30 in September from 33 in August. The index is 53% below year ago levels and has dropped to its lowest point since early 1991. All three components of the index, current sales of single family homes, sales six months from now and foot traffic through model homes continued to decline. Homebuilders' outlook has decidedly turned pessimistic which will continue to impact residential investment and new construction starts going forward.
Tuesday, September 19th
The producer price index rose just 0.1% in August compared to an expected gain of 0.2%. Slower energy price growth led to the smaller gain in wholesale prices. Over the past year energy prices have increased 13.1% adding 1.1 percentage points to an annual 3.6% gain in the PPI. Excluding food and energy, core consumer prices fell 0.4% led by tumbling auto prices. Computer prices also fell. Core producer prices are up 0.9% in the last twelve months.
New residential construction activity tumbled last month as widely telegraphed by a bevy of other housing market indicators. Housing starts fell 6.0% in August to a seasonally adjusted annual rate of 1.665 million, less than the anticipated rate of 1.75 million. Moreover, July starts were revised lower to 1.77 million. Total housing starts are off 20% from their year ago pace and declines appear to be accelerating.
Wednesday, September 20th
The FOMC opted not to raise key short term interest rates again today, leaving the target for the fed funds rate at 5.25%. It was widely expected that the Fed would hold rates steady. The Fed paused in their tightening campaign that began in June 2004 for the first time at the last policy setting meeting in August. The post-meeting policy statement was quite similar to the one released in August. In it, policy makers did acknowledge that "some inflation risks remain" but that a continued moderation in economic growth and cooling in the housing market should help ease inflationary pressures over time. The Fed also cited the recent drop in energy prices and previous rate hikes as factors helping to contain inflationary pressures. The FOMC left the door open for additional firming of monetary policy if incoming data and the evolution of the outlook for both inflation and growth deem it necessary.
The MBA mortgage application index rose 2.0% to 595.8% for the week that ended September 15. Retreating mortgage rates in the last eight weeks has boosted interim application activity. Refinancing applications surged 9.5% on the week as many homeowners moved to convert their adjustable rate mortgages to fixed rates. The purchase index slid 3.0% which corroborates continued slowing in housing market conditions.
Thursday, September 21st
Jobless claims rose 7k to 318k for the week that ended September 16. The level of claims was higher than expected last week however, the four week moving average which smoothes out weekly fluctuations was unchanged at 315,000. The current level of jobless claims indicates a relatively low number of layoffs and moderate hiring.
The Philadelphia Fed survey fell 18.9 points in September to a level of -0.4%. The negative index reading signals worse conditions in the Mid Atlantic manufacturing sector this month compared to last month. Other regional manufacturing surveys for this month have shown continued expansion. Based on these surveys, the ISM index of national manufacturing activity is expected to solid growth but at a slower pace.
Mortgage rates slid again for the eighth time in nine weeks on economic data that shows slowing economic and housing market conditions and alleviation of sharp price gains. 30-year fixed rate mortgages averaged 6.40% this week compared to 6.43% last week according to Freddie Mac's mortgage market survey. Economists at Freddie Mac expect mortgage rates to remain low going forward as a slower economy keeps inflation in check.

Friday, September 22nd
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 11508.10 11560.77 -52.67 or -0.45%
NASDAQ 2218.93 2235.59 -16.66 or -0.74%

WEEK IN ADVANCE
This week wraps up a busy month on the economic and interest rate fronts. While the outlook has come into clearer view the extent to which the economy is slowing and how that will effect policy going forward remains to be seen. The cooling housing market plays a central role in the outlook which places emphasis upcoming home sales data.

Economic Highlights for the Week Ending September 15, 2006

Monday, September 11th
The probability of another Fed rate hike by the end of this year is about 15%. The economic calendar is busy this week with prints on retail sales, import prices, consumer prices and industrial output.
Tuesday, September 12th
The international trade deficit on goods and services widened to $68.0 billion in July from a gap of $64.8 billion in June. The outsized July trade deficit was due to increased imports while exports fell. Both the petroleum and non-petroleum trade balances continued to deteriorate. Falling oil prices in August and September should improve the trade picture somewhat going forward.
The Wall Street Journal reported today that rising inventories of homes available for sale will continue to exert downward pressure on home prices in some parts of the country. Home sales have declined in the past year most notably in areas that have seen the largest price gains in the preceding five years like CA, FL, AZ, MA, and Washington, DC. Analysts and even NAR economists believe we will see price declines for the nation as a whole possibly in the next few months. Price declines, the extent of which remains to be seen, will eventually lead to increased demand and stronger sales.
The Treasury's $8.0 billion, 10-year note auction was met with strong demand today. The notes were awarded a high yield 4.81% lower than an expected yield of 4.82% and received a 2.91 bid-to-cover ratio, much higher than 2.23 in the previous auction. Treasuries rose and prices fell in response to the strong auction results with the 10-year note up 7/32 to 100-25/32 to yield 4.76%.
Wednesday, September 13th
The Treasury budget deficit widened to $64.6 billion in August compared to a deficit of $51.3 billion in August one year ago. For the first 11 months of this fiscal year the cumulative budget deficit totaled $304.3 billion compared to $354.1 billion for the same period last year. The vast improvement in the budget deficit is due to large revenue gains this year although outlays continue to rise sharply.
The MBA mortgage applications index rose 3.2% to 584.2% for the week that ended September 8. Recent easing of mortgage rates has produced a short term gain in application volumes in the last several weeks. However, over the long term application activity has been trending lower and remains 23.2% below its year ago level.
Thursday, September 14th
Retail sales rose 0.2% in August following a 1.4% increase in July. A surprising 0.4% gain in motor vehicle sales contributed to better than expected results last month. Excluding autos, retail sales were up 0.2% in August. Sales increased in most categories except for gasoline and furniture and home furnishings. Consumer spending growth remains healthy and is expected to accelerate in coming months related to recent energy cost declines.
Import prices jumped 0.8% in August, on a 2.3% gain in petroleum prices. Over the past year petroleum prices have increased 24.3% which accounts for 3.9 percentage points of import prices 6.6% annual gain. Export prices climbed 0.4% and are up 5.2% over the past year.
Mortgage rates eased for the seventh time in eight weeks. 30-year fixed rate mortgage averaged 6.43% this week compared to 6.47% last week according to Freddie Mac's mortgage market survey. Mortgage rates are expected to drift in a fairly narrow range as long as inflation remains contained and the Fed holds steady on rates.
Friday, September 15th
The consumer price index rose 0.2% in August, in line with expectations. Energy prices were up 0.3% on the month and have gained 15.0% over the past year. Energy price gains have added 1.1 points to the 3.8% annual increase in the CPI. Excluding food and energy the core CPI gained 0.2% on the month and is up 2.8% on the year. The annual gain is higher than the Fed would like to see however it will not deter them from standing pat on rates next week.

Economic Highlights for the Week Ending September 8, 2006

Monday, September 4th
LABOR DAYAll Markets Closed
Tuesday, September 5th
Motor vehicle sales tumbled 16.5% in August to a 16.1 million unit annual rate. Vehicle sales are down 4.6% over the past year in part related to spent-up demand, higher gas prices and slower job gains. Weak sales are also likely to further reduce production schedules, which could impact economic growth in coming quarters.
The OFHEO house price index rose at an annual rate of 4.8% in Q2, the slowest pace since Q499. The index is based on repeat purchases and includes only conforming loans under a certain dollar amount and refinancing appraisals which can impart an upward bias.
The chances of a Fed rate hike later this month are next to nil and expectations for a bump by the end of the year have fallen to roughly 16%, down from 35% one week ago.
Wednesday, September 6th
The ISM non-manufacturing index jumped to 57.0% in August, better than consensus estimates for a reading of 55.0%. The level of the index indicates continued expansion in service sector activity and is consistent with GDP growth of around 3.5%.
Productivity grew at a 1.6% rate in the second quarter upwardly revised from 1.1% in the preliminary estimate. Productivity growth remains solid although it has slowed over the last two years. As a result of higher hourly compensation, unit labor costs were revised much higher in Q2 to 4.9% from the initial 4.2%. Moreover, unit labor costs were upwardly revised in Q1 to 9.0% from 2.5% originally. Sharply higher unit labor costs could bring a Fed rate hike back into play.
The MBA mortgage applications index rose 1.8% to 566.3% for the week that ended September 1. Slowly retreating mortgage rates in the last few weeks have temporarily boosted application activity. Even so, applications continue to trend lower and remain down 26.6% from their year ago level.
The Fed's survey of economic conditions in their twelve banking districts, known as the beige book, showed continued expansion in most areas in late July and August, however the pace of expansion moderated from the previous report. Consumer spending slowed especially for big ticket items like motor vehicles. Construction activity was mixed; labor markets and hiring were steady but with some spot labor shortages depending on industry and/or occupation. Wages and prices were somewhat elevated. Despite rising inflationary pressures, expectations are for the Fed to hold steady on rates this month.
Thursday, September 7th
NAR economists downwardly revised their forecasts for 2006 as the housing market works its was through inventory and price imbalances. Existing home sales are expected to fall 7.6% this year to an annual rate of 6.54 million. Six months ago, sales were projected to decline 5.7% to 6.67 million. Median prices are expected to increase 2.8% to $225,900 while 30-year fixed rates are likely to rise to 6.7% in Q4.
Mortgage rates crept higher this week on higher wage inflation reported yesterday. 30-year fixed rate mortgages averaged 6.47% this week compared to 6.44% last week according to Freddie Mac's mortgage market survey. Mortgage rates are expected to fluctuate between 6.5% and 7.0% this year as new economic data is released.
Jobless claims fell 9k to 310k for the week that ended September 2. While the level of claims suggests a low number of layoffs it does not necessarily suggest strong hiring. Indeed, job growth has been modest in the last several months averaging around 125k.
Friday, September 8th
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 1392.11 11464.15 -72.04 or 0.62%
NASDAQ 2165.79 2193.16 -27.37 or -1.24%

WEEK IN ADVANCE
Inflation remains the major concern with regards to monetary policy. The Fed is hoping that slower economic growth will help to ease inflationary pressures. It seems that a pause in tightening is baked into the cake for this month. Beyond this month the data will dictate if and when the Fed hikes again. Look for import prices and consumer prices late in week for the latest inflation readings.
Key Interest Rates Latest 6 Mos Ago 1 Yr Ago
Prime Rate 8.25 7.50 6.50
Fed Discount 6.25 5.50 4.50
Fed Funds 5.25 4.51 3.51
11th District COF 4.177 3.347 2.757
10-Year Note 4.76 4.74 4.13
30-Year Treasury Bond 4.91 4.72 4.40
30-Yr Fixed (FHLMC) 6.47 6.37 5.71
15-Yr Fixed (FHLMC) 6.16 6.00 5.30
1-Yr Adj (FHLMC) 5.63 5.45 4.45
6-Mo Libor (FNMA) 5.4501 4.9907 4.0817

Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco
Upward pressure on interest rates Downward pressure on interest rates No pressure to change interest rates News worthy

Economic Highlights for the Week Ending September 1, 2006

Monday, August 28th
Fed funds futures traders are pricing about a 16% chance the Fed will tighten September 20 and roughly a 35% chance policy makers will raise the fed funds rate to 5.50% by the end of the year. A busy data week lies ahead with significant releases on manufacturing, payrolls, and revised Q2 GDP that could change the interest rate outlook.
Tuesday, August 29th
The consumer confidence index tumbled 7.4 points in July to a level of 99.6%, the largest decline since Hurricane Katrina. Expectations were for a more modest decline to a level of 102.5%. The present situation index plunged 10.8 points to its lowest level of the year as the expectations index, down 5.1 points, continued to trend lower. The sharp decline in confidence is a reflection of higher oil prices, softening labor and housing markets and ongoing turmoil in the Middle East.
The minutes to the August 8 FOMC meeting revealed that a pause in tightening was a close call but ultimately, the Fed did not want over tighten. Policy makers felt that more firming could be needed but they wanted to hold rates steady in order to better assess the effects the last 17 rate hikes were having on the economy and inflation.
Wednesday, August 30th
GDP was upwardly revised to an annual rate of 2.9% in the second quarter from the original estimate of 2.5%. Business and consumer spending were better than first thought while residential investment fell at a faster pace than in the earlier reading. Economy-wide inflation was unchanged at 3.3%. The economy has grown at a solid 3.6% rate over the last four quarters.
The MBA mortgage applications index slipped 0.9% to 556.5% for the week that ended August 25. Mortgage rates have been on a gradually declining trend since the middle of last year and are now 23.0% below their year ago level. For the week, the purchase index fell 1.6% while the refinance index remained unchanged.
Thursday, August 31st
Personal income rose 0.5% in July, as expected. Over the past year personal income has been trending higher, growing by a strong 7.1%. Consumer spending increased 0.8% during the period, led by motor vehicle purchases and services spending. A pick up in spending was accompanied by softer inflation. A closely watched inflation gauge contained in this data series, the core PCE deflator rose 0.14% on the month and 2.4% on the year. The annual gain remains high but it has stopped accelerating.
Jobless claims fell 2k to 316k for the week that ended August 26. Jobless claims were little changed this week and have stabilized. The level of claims is consistent with moderate payroll gains.
Mortgage rates eased again this week on reduced rate hike expectations. 30-year fixed rate mortgages averaged 6.44% this week compared to 6.48% last week according to Freddie Mac's mortgage market survey. Mortgage rates remain historically low which many are hoping will result in a soft landing for the cooling housing market.
Friday, September 1st
Payroll employment increased 128k in August matching economists' expectations. Moderate payroll growth was accompanied by softer wage gains as well. Average hourly earnings rose just 0.1% last month compared to an expected 0.3% gain. The unemployment rate eased to 4.7% of the workforce from 4.8% in the previous month. These data combined with other evidence of slowing economic conditions and contained inflationary pressure will help to sway the Fed to remain on hold possibly through the remainder of this year.
Construction spending tumbled 1.2% in July compared to expectations for a 0.1% increase. Moreover, the previous two months were downwardly revised. Private construction expenditures fell 1.3% led by a 2.0% drop in the residential segment. This is the fourth monthly decline in residential building which is off 3.0% year over year.
The ISM manufacturing index slipped to 54.5% in August from 54.7% in July. The level of the index suggests manufacturing activity nationwide continues to expand at a solid pace albeit slightly slower than in 2005. Expansion in the sector is expected to continue through this year and into next.