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
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