Economic Highlights for the Week Ending August 24th, 2007

Monday, August 20th
Rate cut expectations have increased substantially given the Fed's most recent response to an impending credit crunch. Last week, the Fed cut the discount rate by 50 basis points stating that downside risks to economic growth have heightened. The Fed’s tightening bias was essentially reversed to an easing bias given the weaker outlook for economic growth. Fed funds futures traders are fully pricing in a 25 basis point rate cut when the FOMC meets September 18 with a high probability of one more rate cut by the end of the year. Financial market reaction to the Fed’s latest moves will help determine if more easing is necessary.
Tuesday, August 21st
A speech today by Richmond Fed President Lacker dampened expectations of interest rate cuts at the Fed's September meeting. He argued that "financial market volatility, in and of itself, does not require a change in the target federal funds rate." Lacker stated further that financial market troubles only warrant a change in interest rates if it alters the outlook for inflation or growth.
Wednesday, August 22nd
The MBA mortgage applications index fell 5.5% to 641.1% for the week that ended August 17. After two weeks of gains, purchase applications decreased 5.0% while refinance applications dropped 6.4%. Even with the declines, the level of the index suggests healthy application activity; however, with the housing market still searching for the bottom, application activity may reflect shifting financial modalities rather than serving as a leading indicator of housing market activity.
Thursday, August 23rd
Mortgage rates dropped this week amid an ongoing rally in the bond market as investors continue to flee riskier investments affected by the subprime fallout. 30-year fixed rate mortgages averaged 6.52% this week compared to 6.62% last week according to Freddie Mac’s mortgage market survey. Rates are expected to remain under pressure as rate cut expectations continue to grow.
Jobless claims fell by 2k to 322k for the week that ended August 18. The decline, the first in four weeks, was smaller than expected. Jobless claims are on a slightly rising trend indicating a slower pace of hiring. But labor conditions still remain relatively healthy.
Stocks tumbled Thursday in a knee jerk reaction to comments by Countrywide’s Chief Executive, who projected an economic recession based on the housing sector slump negatively affecting consumer spending. For the most part though, the economy remains on solid footing. News that Bank of America invested $2 billion in the nation’s largest lender boosted their beleaguered shares and helped rouse the major indexes back to near even on the day. The Dow was down a fraction to 13235.88. The NASDAQ fell 11.10 to 2541.70.
Friday, August 24th
New home sales gained unexpectedly in July in a hopeful sign of some stabilization in the housing sector. New home sales rose 2.8% last month to an annual rate of 870k and were the strongest in the West where they rose 22.4%.
New orders for durable goods rose 5.9% in July led by demand for motor vehicles and civilian aircraft. Strength was broad based across most all categories. Excluding the transportation sector, durable goods orders still rose a strong 3.7%. Core capital goods orders and shipments, often used as a proxy for business investment, rebounded strongly last month which should boost third quarter growth. Unfilled orders were also up sharply boding well for hard goods production going forward.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 13378.87 13079.08 +299.79 or +2.29%
NASDAQ 2576.69 2505.03 +71.66 or +2.86%
WEEK IN ADVANCE
More housing data on tap in the coming week with the NAR's existing home sales report. July sales will probably maintain around current levels before taking a leg lower when tighter lending standards and higher borrowing costs will show up in the data. The week's calendar rounds out with consumer confidence, personal income and the second revision to Q2 GDP

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

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

Economic Highlights for the Week Ending August 17th, 2007

Monday, August 13th
Moves by foreign and domestic central banks to increase liquidity last week in the face of credit market distress increased the odds of a fed rate cut substantially. Fed funds futures traders are pricing in a 56% chance for a rate cut at the next meeting in September to ensure that the flow of credit does not dry up. Markets are looking for a second rate cut as well by the end of the year.
Retail sales rose 0.3% in July after tumbling in June as consumers spent in department stores, restaurants and on apparel and accessories. Consumers cut spending on gasoline and cars however, because excluding motor vehicle sales, retail sales posted a stronger gain of 0.4%. The July levels of consumer spending are well above their Q2 averages which will help to drive solid economic growth in Q3.
Tuesday, August 14th
The producer price index rose 0.6% in July and showed that prices across all stages of processing were up more than anticipated. As expected, core prices -less food and energy – rose 0.1%. Producer prices are up 4% in the past year, while core prices are up 2.3%, marking the biggest gain in nearly two years.
The international trade deficit narrowed to $58.1 billion in June, while the May deficit was revised down slightly to $59.2 billion. Three major factors influence the trade deficit: energy prices, strong global economic growth and a weakening dollar. Elevated oil prices are due to distortions in oil supply and geopolitical risk. The current price, although lower than the record highs in 2006, is high compared to historic averages.
Wednesday, August 15th
The consumer price index rose 0.1% in July in line with estimates and related to a reprieve in energy price gains. Excluding food and energy prices from the index, core consumer prices rose 0.2% last month to bring the annualized gain to 2.2%, still a bit higher than the Fed would like to see but definitely lower than a cyclical high of 2.9% reached in September 2006. Easing inflationary pressures give the Fed room to move should they decide to cut rates sometime this year.
The MBA mortgage applications index rose 3.4% to 678.7% for the week that ended August 10. Both purchase and refinance indexes increased last week. Application activity overall remains 20% higher than its year ago level. Mortgage rates have declined somewhat in recent weeks and may account for the recent surge in application activity; however it could be related to multiple applications being filed rather than an increase in sales or refinance activity.
The NAHB housing market index fell 2 points in August to a level of 22. This is a new cyclical low and the second lowest reading on record since the index began in 1985. Builders rated present single family sales lower while projecting lower sales six months from now. Foot traffic through model homes also fell to its lowest level ever. Tighter lending standards, higher mortgage rates and rising defaults continue to pressure new home sales with builders unable to work off high inventory levels. Economists say that the bottom in the housing correction has yet to be reached and project that recovery in the sector could be as far off as the middle of next year.
Thursday, August 16th
Housing starts tumbled 6.1% in July to a rate of 1.38 million. New construction starts have slowed 20.9% over the last year under faltering sales and tighter credit. Both single family and multifamily starts declined last month. Building permits which are often used as a proxy for future new starts activity fell 2.8% to 1.37 million. Sinking permit issuance, dour home builder sentiment, bloated inventories, weakened demand and tighter credit all point toward further contraction in the home building business. Housing's contribution to economic growth will be substantially negative again in Q3 and probably Q4 as well.
Mortgage rates edged higher in the past week as Treasury prices settled down after a huge run-up related to credit market woes and equity decline. 30-year fixed rate mortgages averaged 6.62% this week compared to 6.59% last week according to Freddie Mac’s mortgage market survey. Economists at Freddie Mac stated today that problems in the non-prime sector have not yet affected the prime conforming market.
Friday, August 17th
The Fed cut the discount rate, the rate at which the Fed loans money to banks, by 50 basis points today in an effort to bring some order to recent gyrations in the financial markets. The Fed also said that downside risks to economic growth have heightened and that they are prepared to take further action if necessary.

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

Economic Highlights for the Week Ending August 10, 2007

Monday, August 6th
Rate cut expectation have soared for future Fed meetings based on credit market concerns and the fallout from the subprime sector. Fed funds futures traders are pricing in a 92% chance the Fed will cut the target rate by 25 basis points to 5.0% when they meet October 31 compared with 14% odds just two weeks ago.
Tuesday, August 7th
The FOMC held rates steady today, leaving the target for the fed funds rate at 5.25%. This was the ninth straight meeting without a change in rates. Before that, the Fed bumped rates 17 times in a row moving the target from 1.0% to its current level of 5.25%. Non-action on monetary policy was widely expected. However there were changes in the policy statement language released after the meeting. First, the Fed acknowledged financial market volatility referring to recent capital market gyrations, the widening of credit spreads and tightening of credit standards. Secondly, the Committee expects continued moderate economic expansion but added that it will be supported by employment growth and a robust global economy. Finally, the Fed set the stage a balanced risk bias by saying their predominant concern remains inflation, but that downside risks to growth have increased somewhat. As always they wrapped up by saying that future policy adjustments will depend on incoming economic data.
Productivity grew at a 1.8% rate in Q2, compared to 0.7% in Q1. In the last five years productivity increased an average 2.1% per year, but has slowed in the past year to a paltry gain of 0.6%. Unit labor costs accelerated at a 2.1% rate in Q2, higher than an expected gain of 1.6%.
Consumer credit outstanding increased in June by $13.2 billion to$ 2.459 trillion, more than twice what the market expected. By historical standards, growth in revolving and non-revolving credit remained robust while advancing 8.4% and 5.3% respectively, over the month.
Wednesday, August 8th
The MBA mortgage applications index jumped 8.1% to 656.5% for the week that ended August 3. The purchase index shot up 7.4% to 447.4%, while the refinance index surged 9.1% to 1881.1%, its highest level since mid May. The gain in application activity this week could be a result of the recent downward pressure on rates but a rebound in the housing sector is not expected anytime soon.
The NAR lowered housing sales forecasts for the sixth straight month but said that price declines will be less severe. The Realtor group said they expect existing home sales to total 6.04 million in 2007, down from 6.22 million units predicted last month. The forecasted pace is still above June's rate of 5.75 million. The median price for an existing home is forecast to fall 1.2% to $219,300 this year slightly less than the 1.4% drop estimated a month ago.
Thursday, August 9th
Jobless claims rose 7k to 316k for the week that ended August 4. The four week moving average was up 2k in the last week and continuing claims increased 39k in the prior week. Initial claims rose in the last two weeks but remain in a relatively narrow and tight range. The gradual increase over the last couple of weeks though, is consistent with a reduced pace of hiring.
Lenders lowered mortgage interest rates this week amid softer job creation in July and an uptick in the unemployment rate. 30-year fixed rate mortgages averaged 6.59% this week compared to 6.68% last week according to Freddie Mac's mortgage market survey. Separately, Freddie Mac reported that cash out refinancing totaled $76.7 billion in the second quarter, $24.5 billion less than in the same quarter a year ago. Tougher credit standards and slumping house price appreciation likely resulted in the decline.
Treasury prices surged Thursday as subprime and credit market woes substantially increased the flight to quality bid in the bond market. News of the ECB loaning almost 95 billion euros to banks to avoid a cash crunch and France cutting off access to three funds exposed to U.S. credit markets boosted inflows. Rate cut expectations shot higher due to credit market turmoil and related issues, with fed funds futures traders pricing in nearly a 100% chance of a cut in September. The benchmark 10-year note was up 21/32 to 99-23/32 to yield 4.77%.
Friday, August 10th
Import prices jumped 1.5% in July compared to expectations for a 1.0% increase. A 7.0% surge in petroleum prices was at cause again for pushing overall import prices higher last month. Non-petroleum import prices gained just 0.2% in July. There is a risk that sharply higher import prices related to higher energy costs would be passed through to other goods and services.

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

Economic Week in Advance

The FOMC meeting in the coming week is the highlight on an otherwise light economic calendar. Financial markets will be parsing the language in the policy statement as usual for indications on the interest rate and economic outlook. No significant changes are expected either in the fed funds target rate or in the post-meeting statement.
Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco

Economic Highlights for the Week Ending August 3, 2007

Monday, July 30th

Bargain hunters were out Monday snapping up shares after last week's severe sell off. Investors, rotating back into stocks, showed interest in financials, homebuilders and retailers. Merger activity provided some lift but some deals stalled due to the credit crunch. Stocks rallied in the afternoon to end higher on the day. The Dow was up 92.84 to 13358.31. The NASDAQ gained 21.04 to 2583.28.
Tuesday, July 31st
Personal income rose 0.4% in June, less than an expected 0.5% gain. Consumer spending increased only 0.1% during the month due to soft retail and motor vehicle sales. A closely watched inflation gauge contained in this data series, the core PCE price index, gained just 0.1% on the month and 1.9% on the year. The annual gain in the price index is within the Fed's preferred range for inflation.
The consumer confidence index shot up 7.3 points in July to 112.6%. This is the highest confidence reading since August 2001. Ratings of both the present situation and expectations for the future increased substantially. Surprising given higher gas prices, modest job creation and stagnant house price appreciation.The monthly surge in confidence is welcome; however downside risks remain in the near term.
The employment cost index rose 0.9% in Q2 as benefit costs surged and wage gains fell mildly from the first quarter. For the year ending in June total compensation increased 3.3% up from a 3.0% gain in Q1.
Construction spending fell 0.3% in June compared to expectations for a 0.2% increase. This was the first decline in the past five months. Residential construction weakness continues to weigh on overall spending. In June, public construction and the nonresidential category provided little offset. There is little indication that residential weakness will abate soon.
Wednesday, August 1st
The ISM manufacturing index fell 2.2 points in July to 53.8%. Expectations were for a reading of 55.5%. Manufacturers kept the lid on inventories, which fell for the twelfth consecutive month. Because of the correlation to GDP growth, if these data maintain through September, it would indicate slower growth in Q3 than experienced in Q2.
Vehicle sales slipped in July, to a pace of 15.5 million units. The figures point to weakening credit quality, restrained employment trends and ascending fuel prices as probable causes for softness in sales.
The MBA mortgage applications index fell 0.3% to 607.1% for the week ending July 27. Despite a seven week decline, mortgage applications were 15.1% above a year ago.
Thursday, August 2nd
Sharply lower yields in the bond market placed downward pressure on mortgage interest rates this week however long term mortgage rates only edged down slightly. Bond yields have been tumbling lately as the subprime fallout drove investors into safer Treasury securities. 30-year fixed rate mortgages averaged 6.68% this week compared to 6.69% last week according to Freddie Mac's mortgage market survey.
Jobless claims rose 4k to 307k for the week ending July 28. Initial claims have settled into a relatively low and narrow range implying on-trend payroll creation and fairly tight labor market conditions.
Friday, August 3rd
Payroll employment increased 92k in July, less than an anticipated gain of 130k. Moreover, the prior two months were revised lower for 8k net fewer jobs. In July, strong service sector job growth was partially offset by job losses in government, manufacturing, and construction industries. Hourly earning rose 0.3%, in line with expectations while unemployment edged 0.1% higher to a 4.6% rate. These data point to a gradual softening of labor market conditions without significant wage pressures. Lack of inflation warnings and mild growth will keep the Fed on hold in the foreseeable future.


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