Monday, December 11th
Stronger than expected payroll gains in November prompted the financial markets to pullback on rate cut expectations for next year. Fed funds futures traders are pricing in a very slim chance of a rate cut following the FOMC meeting at the end of January and odds of just 24% for an easing in March, down from about 70% earlier last week.
Tuesday, December 12th
The FOMC opted to hold monetary policy steady today, as widely expected, leaving the target for the fed funds rate unchanged at 5.25%. This is the fourth straight meeting the Fed has remained on hold. In the policy statement the committee acknowledged that recent economic data have been mixed and that the correction in the housing market has been substantial. Policymakers believe though, that the economy will continue to expand at a moderate pace going forward. The Fed said they still see elevated core inflationary pressures but that reduced energy prices, low inflation expectations, and previous tightening should help to contain inflation over time. As risks do remain, the FOMC stated that they would raise rates again if incoming data deemed it necessary.
Wednesday, December 13th
Retail sales surged 1.0% in November led by strong demand for electronics and appliances, building materials, gasoline and autos. Excluding the large and often volatile auto and gas segments, retail sales still gained 0.9%. A strong start to the holiday shopping season should provide a lift to Q4 economic growth as well.
The MBA mortgage applications index jumped 11.4% to 721.2% for the week that ended December 8. Purchase activity was up 8.7% on the week while refinancing application volumes soared 15.8%. Purchase apps remain 3.0% below their year ago levels but refinancing applications are up an astounding 59.8% primarily due to homeowners converting their adjustable rate mortgages and locking in fixed rates.
Refinancing activity is up but surprisingly not all ARM holders want to convert into a fixed rate mortgage. According to CNN Money, some people are considering interest only and payment option loans instead because they may not be able to afford a higher, fixed rate. While those types of financing may be good in some circumstances, mortgage professionals say there is a window of opportunity now because of a recent dip in average fixed rates. One-year ARMs currently average 5.43% while 30-year fixed rates are averaging just 6.11% according to Freddie Mac's mortgage market survey.
Thursday, December 14th
Import prices rose 0.2% in November despite another drop in petroleum prices, which fell 1.6% on the month. Crude oil prices have risen since the data was collected and will result in higher import prices in December.
Mortgage rates edged slightly higher this week on recent economic reports for November showing stronger job creation and retail sales. 30-year fixed rate mortgages averaged 6.12% this week compared to 6.11% last week according to Freddie Mac's mortgage market survey. Historically low mortgage rates last week pushed mortgage application volumes to their highest levels this year.
Jobless claims tumbled 20k to 304k for the week that ended December 9. Initial claims have regained their previous low level which suggests relatively tight labor market conditions with moderate monthly payroll gains. Jobless claims have averaged 312k a week this year compared to 332k a week in 2005.
Friday, December 15th
Consumer prices were unchanged in November, less than estimates for a 0.2% gain. A 0.2% decline in energy costs helped to stabilize overall prices last month. The CPI has gained 2.0% over the past year. Excluding food and energy from the index core consumer inflation was also unchanged in November. Over the past year, the core rate has run at a 2.6% pace. Certainly with inflation well contained the Fed will not be compelled to raise rates, as alluded to in the last policy statement.
Industrial production increased 0.2% in November, slightly better than expected. Gains in manufacturing output offset declines in mining and utilities. Capacity utilization rates remained unchanged last month at 81.8%. Despite the gain last month, industrial activity continues to slow along with usage rates. Slower resource utilization will help to ease pricing pressures going forward.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 12445.52 12307.49 +138.03 or +1.12%
NASDAQ 2457.20 2437.36 +19.84 or +0.81%
WEEK IN ADVANCE
The inflation outlook is improving as we head into 2007 which potentially means continued low interest rates. This week's economic calendar provides more data on the inflation front as well as home building, manufacturing and consumer attitudes.
Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco

Economic Highlights for the Week Ending December 8, 2006

Monday, December 4th
The NAR's pending home sales index fell 1.7% in October after a 1.1% drop in September. The index measures the number of signed contracts and is considered a leading indicator of existing home sales. Recent index declines suggest that after rebounding in October, existing home sales will be softer in November and December.
Weaker than expected economic conditions heading into the fourth quarter combined with other signals such as a weaker dollar and reduction in the yield curve inversion have increased rate cut expectations. While the Fed is expected to remain on hold when they meet next week chances have increased to 25% for a rate cut at the end of January with fed funds futures traders pricing in roughly a 70% chance of easing following the conclusion of the March meeting.
Tuesday, December 5th
The ISM non-manufacturing index increased to 58.9% in November from 57.1% in October. Expectations were for a small decline to a reading of 56.0%. The level of the index suggests that the service producing sectors of the economy are expanding nicely and are expected to extend gains through the holiday season. Some deceleration in activity is expected post-holidays.
Productivity was upwardly revised to show a 0.2% rate of growth in the third quarter rather than a flat reading in the preliminary estimate. Even with the revision, growth in productivity was slower than expected. Also, longer term growth is down as well with productivity gaining just 1.4% over the past year compared to an average yearly gain of 3.1% since 2000. Inflation news was good as unit labor costs were downwardly revised to 2.3% in Q3 vs. 3.8% originally.
Wednesday, December 6th
The MBA mortgage applications index jumped 8.1% to 647.6% for the week that ended December 1. The purchase index was up 4.9% on the week while the refinance index surged 13.9%. The gain in the purchase index reflects more stable home buying activity while the gain in the refinance index is mostly attributable to homeowners converting their adjustable rate mortgages and locking in fixed rates.
Thursday, December 7th
Consumer credit declined $1.2 billion in October and is growing at a 4.2% rate over the past year. The decline was led by the non-revolving credit category which fell by $4.2 billion due to softer vehicle sales during the month. Revolving credit outstanding increased $2.9 billion in October. Cash out refinancing activity has limited consumer credit growth. Strong refinancing activity has been driven lately by homeowners, facing resets on their adjustable rate mortgages are looking to lock in fixed rates.
Jobless claims tumbled 34k to 324k for the week that ended December 2. This week's decline almost totally reverses last week's gain. Claims data tends to be volatile during the holidays and severe winter weather. Nevertheless, the level of claims is consistent with fairly tight labor market conditions and modest monthly payroll gains.
Mortgage rates slipped again this week on continued signs of slowing in the housing market and weakness in the manufacturing sector. 30-year fixed rate mortgages averaged 6.11% this week compared to 6.14% last week according to Freddie Mac's mortgage market survey. Economists at Freddie Mac project that the correction in the housing market is about two-thirds of the way through and with conditions stabilizing around mid-2007.
Friday, December 8th
The economy created 132,000 new jobs in November, higher than expectations for a gain of 110,000. Moreover, revisions in the prior two months resulted in a net 42,000 more jobs. Average hourly earnings rose 0.2% on the month, less than expected, while the average workweek remained unchanged at 33.9 hours. The unemployment rate climbed 0.1% to 4.5% of the workforce. Labor market strength was apparent but not so robust as to rekindle rate hike fears.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 12307.49 12194.13 +113.36 or +0.93%
NASDAQ 2437.36 2413.21 +24.15 or +1.00%
WEEK IN ADVANCE
Unanimous expectations for steady monetary policy at the FOMC meeting Tuesday will put most of the attention on the statement following the meeting, as usual. Other data this week including retail sales, the consumer price index and industrial production will garner their share of attention as well and help to refine the economic and interest rate outlook going forward.

Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco

Economic Highlights for the Week Ending December 1, 2006

Monday, November 27th
The economic calendar yields a ton of data this week with housing sales figures and manufacturing performance highlighting.
Tuesday, November 28th
New orders for durable goods plunged 8.3% in October, after gaining 8.7% in September. The outsized decline was led by a huge drop in orders for civilian aircraft, though other categories of durable manufacturing were also weaker.
Consumer confidence fell to 102.9% in November from 105.1% in October. Slippage in attitudes and risks to confidence going forward are related to gasoline price movements and tight labor market conditions.
Existing home sales increased 0.5% in October to an annual rate of 6.24 million, better than an expected rate of 6.14 million. Despite the modest bounce last month home re-sales have been trending lower since peaking in summer of 2005 than a year ago and 14.2% below the record high set in June of last year.
Wednesday, November 29th
GDP grew at a 2.2% rate in Q3, up from 1.6% in the advance estimate. Stronger business and government spending and higher net exports led to the upward revision however, consumer spending and residential investment were weaker than first thought. Economy-wide inflation remained unchanged at an annualized rate of 1.8%.
New home sales tumbled in October as builders try to correct large inventories by slowing new construction. Sales of new homes fell 3.1% last month to an annual rate of 1.00 million units. Over the past year new home sales have declined 25.4%.
The MBA mortgage applications index fell 3.9% to 599.0% for the week that ended November 24. The purchase index rose 1.3% and has been over the 400% level for the past four weeks, suggesting some stabilization in home purchase activity. The refinance index plunged 9.6% on the week but remains 17.9% higher than a year ago indicating still strong refi activity related to homeowners locking in fixed rates.
The Fed's beige book, compiled in preparation for the December 13 FOMC meeting was surprisingly upbeat today with signs of softness reported in just housing and auto manufacturing. Other than those sectors, economic conditions were largely positive during the October to mid-November period. Based on this report and other data the Fed is widely expected to hold rates steady when they meet this month.
Thursday, November 30th
Personal income rose 0.4% in October, led by a 0.6% increase in wages and salaries. Consumer spending remained weak, up 0.2% on the month and just 5.0% on the year. A closely watched inflation gauge in this data series, the core PCE deflator gained 0.2% in October and 2.4% over the past year. The annual gain has receded recently but still remains somewhat elevated.
Mortgage rates dropped for the fifth time as 30-year fixed rates fell to 6.14% this week compared to 6.18% last week according to Freddie Mac's mortgage market survey. The 30-year fixed averaged 6.12% as of January 26 and was 6.26% one year ago. Economists at Freddie Mac note that lower rates combined with some softening in home prices should keep home purchase activity healthy going forward.
Friday, December 1st
The ISM manufacturing index fell to 49.5% in November from a reading of 51.2% in October. New orders, production, and employment were all below 50%. Also, the price index rose on higher energy costs. An index reading below 50% indicates contraction in the manufacturing sector and the economy. Historically, when the ISM index dips below the key 50% level, the Fed starts to cut interest rates.
Construction spending fell 1.0% in October, weaker than an expected decline of 0.4%. Weakness was concentrated in the private sector, more specifically the residential component. Declines in residential construction spending have been accelerating recently and will continue to subtract heavily from fourth quarter GDP.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 12194.13 12342.56 -148.43 or -1.20%
NASDAQ 2413.21 2445.86 -32.65 or -1.33%

WEEK IN ADVANCE
The employment report Friday is the most important indicator on an otherwise light economic calendar this week. Payrolls take on added significance given recent, weaker data readings. While the Fed is widely expected to remain on hold this month, rate cut expectations are increasing for the first quarter of next year.

Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco