Economic Highlights for the Week Ending October 6, 2006

Monday, October 2nd
Financial markets are not expecting any adjustments, either up or down, in monetary policy for the remainder of the year. Fed funds futures traders fully expect the Fed to remain on hold through this year. Currently, traders are pricing in about a 25% chance the Fed could lower rates at the FOMC meeting at the end of January 2007 but time and the data will tell.
The ISM manufacturing index fell to 52.9% in September from a reading of 54.5% in August. The bigger than expected drop in the index shows slowing in national manufacturing conditions with employment and price declines on the month. New orders remained steady which indicates stability in the sector with solid production in coming months.
The NAR's pending home sales index rebounded in August, gaining 4.3% to 110.1 from a level of 105.6 in July. The jump in the index bodes well for existing homes sales. Home buyers are likely responding to falling mortgage rates and somewhat softer home prices. Hence, we should see existing home sales stabilize at current solid levels.
Construction spending increased 0.3% in August, better than expected. Strength was derived from a 3.4% jump non-residential expenditures while residential investment fell 1.5% on the month.
Tuesday, October 3rd
Motor vehicle sales rose 3.5% in September to an annual rate of 16.6 million units. Lower gasoline prices probably stimulated auto purchases. While the rebound in September will boost monthly retail sales, a flat trend in vehicle sales has created excess inventories which will detract from next quarter production levels, reducing Q4 GDP growth.
Wednesday, October 4th
The ISM non-manufacturing index tumbled 4.1 points to 52.9% in September. Last month's reading was much lower than expected but is still consistent with expansion in the service sector albeit at a much slower pace. Despite the weak headline number, index components were generally stronger with gains in new orders, order backlogs and employment suggesting a pick up in activity next month.
The MBA mortgage applications index jumped 11.9% to 633.9% for the week that ended September 29. Lower mortgage rates over the past two months brought the volume of both purchase and refi application up significantly this week. The purchase index gained 7.6% while refinancing activity soared 17.5% as borrowers converted from adjustable to fixed rate mortgages.
Thursday, October 5th
Jobless claims fell 17k to 302k for the week that ended September 30. The drop in claims is unexpected and inconsistent with other data that suggests slower job growth. Expectations are for the level of claims to climb higher on housing related job losses.
Mortgage rates were lower but little changed this week on expectations the Fed will remain on hold for the remainder of this year. 30-year fixed rate mortgages averaged 6.30% this week compared to 6.31% last week according to Freddie Mac's mortgage market survey. Economists at Freddie Mac note that lower rates recently are providing an opportunity for homeowners to refinance their ARMs before they reset to higher rates in the future.
Friday, October 6th
Payroll employment increased just 51k in September much less than an expected gain of 120k. However, the prior two months were upwardly revised for a net increase of 62k jobs. September weakness was offset by higher job gains in the preceding months to keep payrolls in line with the current trend of modest growth. Average hourly earnings increased 0.2% for a year over year gain of 4.0% while the unemployment rate fell to 4.6% of the workforce.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 11850.21 11679.07 +171.14 or +1.46%
NASDAQ 2299.99 2258.43 +41.56 or +1.84%
WEEK IN ADVANCE
Mixed employment data today did little to set a clear course for the economy and interest rates. Data watch will intensify as financial markets decipher the outlook. In the coming week, retail sales, due out on Friday, highlight. Also, the Fed minutes from September will be of interest as will the beige book compiled in preparation for the October 24 FOMC meeting.
Key Interest Rates Latest 6 Mos Ago 1 Yr Ago
Prime Rate 8.25% 7.75% 6.75%
Fed Discount 6.25% 5.75% 4.75%
Fed Funds 5.25% 4.88% 3.85%
11th District COF 4.277% 3.604% 2.870%
10-Year Note 4.69% 4.89% 4.37%
30-Year Treasury Bond 4.84% 4.94% 4.56%
30-Yr Fixed (FHLMC) 6.30% 6.43% 5.98%
15-Yr Fixed (FHLMC) 5.98% 6.10% 5.54%
1-Yr Adj (FHLMC) 5.46% 5.57% 4.77%
6-Mo Libor (FNMA) 5.3704% 5.1196% 4.2154%
Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco