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
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