Week In Advance

Home sales data dominates the calendar in the coming week. Weak results are expected for a month or two, until the Fed's rate cuts kick in to help turn housing market conditions around.

Economic Highlights for the Week Ending September 21, 2007

Monday, September 17th
Stocks closed lower in choppy trading Monday, ahead of the FOMC meeting slated for Tuesday. The size of the expected rate cut in the fed funds target and subsequent lowering of the discount rate are still quite divergent. Stocks bounced around throughout the session on a weak regional manufacturing survey, higher oil prices and dismissal of Microsoft's appeal in a European antitrust case. The Dow dropped 39.10 to 13403.42. The NASDAQ was down 20.52 to 2581.66.
Tuesday, September 18th
The producer price index, a measure of wholesale inflation, tumbled 1.4% in August as energy prices tanked 6.6% during the month. Gasoline, natural gas, heating oil and diesel fuel costs all fell, but have subsequently shot upward. Core prices, excluding fuel and food costs, rose 0.2% last month and are up 2.2% over the past year.
The NAHB housing market index fell 2 points to a level of 20 in September. This was the lowest index reading since the beginning of 1991. Homebuilders continue to be pessimistic, with weakness centered on futures sales forecasts. Present single family home sales were rated modestly lower while foot traffic through model homes was unchanged from August. Weakness is likely to persist in housing conditions in the near term due to huge inventories. However, the Association said that they expect homes sales to return to an upward path in Q2 of next year.
The FOMC at its policy meeting today acted decisively to lower the target for the fed funds rate to 4.75%, a cut of 50 basis points. They also cut the discount rate by 50 basis points to 5.25%. The financial markets were expecting a quarter point easing but were very pleased with the deeper, half point cut. This was the first policy adjustment by the Fed after nine straight meetings without a change. The Committee cited slower economic growth and potential downside risk to the economy going forward due to financial and credit market turmoil. Policymakers will continue to monitor the situation carefully and act as needed to sustain economic growth and price stability.
Wednesday, September 19th
The consumer price index fell 0.1% in August led by a 3.2% drop in energy prices. The CPI gained 1.9% over the past twelve months. Excluding food and energy, core consumer prices increased 0.2% on the month and 2.1% on the year. The headline CPI could spike in the next month or two as higher oil prices are integrated into the index. Core consumer prices have been slowly retreating over the last 11 months as the pace of economic growth has slowed.
Housing starts fell 2.6% in August to an annual rate of 1.33 million, slightly lower than an expected rate of 1.36 million. Starts in August hit their lowest level since June 1995. Housing starts have tumbled 19.1% over the past year and are now off 41.9% from their peak level achieved in January 2006. Weakness in overall starts was once again led by a 7.1% plunge in single family construction starts last month.
The MBA mortgage applications index rose 2.4% to 673.2% for the week ending September 14. Both purchase and refinance applications increased last week. Application volumes have remained in a narrow range most of this year and are little changed now, after the onset of credit market disruptions. Lower rates will help to support mortgage activity going forward.
Thursday, September 20th
The index of leading economic indicators fell 0.6% in August from an upwardly revised gain of 0.7% in July. Most of the index components fell except for money supply, which received a boost from the Fed who increased liquidity in the banking system in August to counter problems in credit markets. Though volatile, the index is trending only slightly lower, a harbinger of continued sluggish economic growth.
Jobless claims fell 9k to 311k for the week that ended September 15 despite widespread layoffs in the home building and mortgage lending industries. Even with the weekly drop in claims, softer hiring conditions are expected to continue going forward.
Long term mortgage rates edged slightly higher this week but remain at lower levels not seen since May. 30-year fixed rate mortgages averaged 6.34% this week compared to 6.31% last week according to Freddie Mac’s mortgage market survey.
Friday, September 21st
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 13820.19 13442.52 +377.67 or +2.81%
NASDAQ 2671.22 2602.18 +69.04 or +2.65%

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

The Federal Open Market Committee

WASHINGTON (MarketWatch) - The Federal Open Market Committee cut its benchmark federal funds rate by a half percentage point to 4.75%. In an effort to ease the credit crunch, the Federal Reserve also reduced its discount rate in lockstep to 5.25%. This is the first cut in the federal funds rate since June 2003. In a statement, the FOMC said the action "was necessary to forestall some of the adverse effects on the broad economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time." The Fed said that some inflation risks remain. It said the credit crunch could hurt the economy.

Copyright © 2007 MarketWatch, Inc. All rights reserved.

Week In Advance

The FOMC meeting takes center stage next week. While a rate cut is most certainly in the offing, there has been ongoing conjecture about how much the Fed will ease – a quarter or a half point. Regardless of the size of the policy adjustment, there will likely be more rate cuts to follow this one, later this year.

Economic Highlights for the Week Ending September 14, 2007

Monday, September 10th
The downside surprise in the number of August payrolls boosted expectations of an aggressive Fed rate cut later this month when the FOMC meets. Fed funds futures traders are pricing in an 80% probability the FOMC will lower the target fed funds rate by 50 basis points with a quarter point cut a virtual certainty, according to the markets.
Consumer credit increased by $7.4 billion in July less than an expected $9.0 billion gain. Over the past year, consumer credit has grown at a 4.8% rate, although it has been accelerating in recent months. Stronger growth in the revolving credit category led the gain. Non-revolving debt balances rose modestly. The latest consumer credit data does not yet reflect the tightening of credit standards caused by credit market turmoil. Credit is still rising broadly in line with disposable income.
Tuesday, September 11th
Exports rose the most in three years, accounting for an unanticipated narrowing of the U.S. trade deficit in July to $59.2 billion from a revised $59.4 billion in June. American manufacturers shipped more machines, airplanes and automobiles overseas. The improvement reflects relatively stronger growth in exports though imports also rose.
Wednesday, September 12th
The MBA mortgage applications index gained 5.5% to 657.4% for the week that ended September 7. The recent drop in mortgage rates has provided an opportunity for buying and refinancing. Both types of applications increased in the last week. Total applications remain 12.5% above year ago levels. Continued downward pressure on rates going forward could be a boon to the beleaguered mortgage market.
Thursday, September 13th
Mortgage rates plunged in the last week as rate cut expectations increased after the dismal report on August payrolls. 30-year fixed rate mortgages averaged 6.31% this week compared to 6.46% last week according to Freddie Mac's mortgage market survey. Economists at Freddie Mac note that sharply lower rates could help borrowers who are facing resets to refinance.
Jobless claims rose 4k to 319k for the week ending September 8, slightly lower than expected perhaps as a result of the Labor Day holiday and shortened work week. While layoffs remain contained, the pace of hiring has slowed resulting in weak net job creation.
Friday, September 14th
Retail sales rose 0.3% in August after a 0.5% gain in July. A tad weaker than expected, August retail sales were underpinned by strong auto sales. Excluding autos, retail sales fell 0.4% last month. Despite some weakness in August, spending remains above its Q2 averages which suggests a small boost to 3Q GDP.
Industrial production rose 0.2% in August, less than expected and based on weak manufacturing and mining output. A surge in utilities usage prevented a decline in total production. Capacity usage for output remained elevated but unchanged at 82.2%.
Import prices fell 0.3% in August due to a temporary drop in petroleum prices, which fell 1.3% on the month but have spiked sharply since then. Outside of the energy complex, import prices are still trending modestly higher but are unlikely to put significant pressure on consumer and producer prices for the same period.
Consumer sentiment rose to 83.8% in early September from a reading of 83.4% in August. Ratings of current conditions were about on par with the previous month while consumer expectations rose modestly. Sentiment levels appear to have stabilized for the moment at a lackluster level, which may be good given recent financial, housing and credit market turmoil. The final reading on sentiment will be released in two weeks.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 13442.52 13113.38 +339.14 or +2.51%
NASDAQ 2602.18 2565.70 +36.48 or +1.42%

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

Econimic Week in Advance

Jobs data this week made a rate cut a virtual certainty and most probably a necessity at the next FOMC meeting. The question is now; will it be an incremental 25 basis point cut or an aggressive 50 basis point cut? The Fed will be watching financial developments and other data up to the meeting date, Sept. 18, to determine their next policy move.
Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco

Economic Highlights for the Week Ending September 7, 2007

MONDAY, September 3rd
LABOR DAY
All Markets Closed

TUESDAY, September 4th
The ISM index fell to 52.9% in August as demand waned for furniture, automobiles and computers after borrowing costs spiked. The level of the index shows continued expansion in the manufacturing sector but at a slower pace than in Q2. Manufacturing activity faces downside risks going forward if business investment falters.
Homebuilders are pulling back in an effort to reduce the abundance of unsold residential properties even as companies continue to add offices and factories. Construction spending decreased 0.4% in July, which is 2.0% lower than a year ago. Battered by a 1.4% decline in residential construction, private construction numbers decreased 0.7%, while public construction increased by 0.7%
WEDNESDAY, September 5th
The NAR's pending home sales index dropped 12.2% in July, in its sharpest decrease since September 2001 when it fell 16.1% from its year earlier level. The index tracks the number of signed real estate contracts and is considered a leading indicator of existing home sales. The sharp downturn in July is expected to be followed by another decline in August because of major mortgage market disruptions this summer.
The MBA mortgage applications index rose 1.3% to 622.9% for the week that ended August 31. Both purchase and refinancing indexes gained on the week. The overall index remains only modestly below its level during the first half of July before credit market troubles began. Despite subsequent volatility related to credit woes, the current level of mortgage applications remains 10% above its year ago level.
The Fed's survey of economic activity in the twelve Federal Reserve Banking Districts known as the beige book showed that economic activity continued to expand in most regions although at a slower pace in a few. Most Banks reported tighter lending standards for residential mortgages which has impacted housing activity. Outside of real estate, financial and credit market turmoil has had limited effect on the overall economy. The report signals still solid economic conditions which is not exactly a sure-fire catalyst for a rate cut September 18. Even so, it is likely the FOMC will cut rates when they meet in two weeks.
THURSDAY, September 6th
The ISM non-manufacturing index was 55.8% in August, unchanged from its July reading. Stronger than expected service industry activity last month was surprising since home construction, mortgage finance and financial services are part of the sector. Service sector activity continued to grow on a monthly basis, although there has been some slowing on a trend basis since mid-2004.
Productivity was upwardly revised to a rate of 2.6% in Q2 from 1.8% in the preliminary estimate. Unit labor costs were downwardly adjusted to 1.4% from the original print of 2.1%. Despite the improvement last quarter, productivity has trended lower over the last several years while unit labor costs continue to trend higher.
Jobless claims fell 19k to 318k for the week that ended September 1. The first drop in claims numbers in the past seven weeks puts the level of claims back near their year-to-date average, which is only slightly higher than its 2006 average. Nevertheless, these data suggest that August payrolls will likely be on the soft side amid somewhat sluggish labor market conditions.
FRIDAY, September 7th
Payrolls declined by 4k in August compared to expectations for a 100k gain. Moreover, revisions in the previous two months resulted in another net loss of 81k jobs. Weakness was led by steep losses in manufacturing and construction jobs. The unemployment rate however, remained unchanged at 4.6%. The housing correction is indeed impacting the broader economy. The downside risks to the economy going forward provide enough impetus for the Fed to cut rates when they meet September 18.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 13113.38 13357.74 -244.36 or -1.83%
NASDAQ 2565.70 2596.36 -30.66 or -1.18%
Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco

Economic Highlights for the Week Ending August 31, 2007

MONDAY, August 27th
Existing home sales slipped 0.2% in July to an annual rate of 5.75 million units, compared to an expected rate of 5.70 million. This was the slowest pace of home sales since November 2002. Existing home sales remain down 9.0% on the year.
Financial markets are maintaining their expectations for a Fed rate cut in September. Fed funds futures traders are fully pricing in a 25 basis point rate cut in the target fed funds rate at the next FOMC meeting. A rate cut however is not a done deal. It’s interesting to note that the effective fed funds rate has been between 4.5% and 5.0% since August 10, when the Fed increased liquidity in the banking system to help calm credit market fears. The question is, will the Fed wait for the effective rate to move higher before formalizing a cut in the target?
TUESDAY, August 28th
The consumer confidence index fell to 105 in August from 1119 in July. Consumers' ratings of both the present situation and expectations for the future dropped sharply this month. Confidence levels were impacted mainly by recent financial market turmoil and sluggish labor market conditions. Downside risks remain as consumers cope with high debt burdens, rising gas prices, tighter credit and softer home prices.
WEDNESDAY, August 29th
The MBA mortgage applications index fell 4.0% to 615.2% for the week that ended August 24. Despite turmoil in the mortgage markets, application volume remains 10.5% higher than its year ago level. Both purchase and refinance applications dropped in the last week. Mortgage application activity retreated sharply in the last two weeks which is more consistent with the downturn in housing market conditions.
When credit conditions tighten, more home buyers are rejected which leads to larger application volumes when buyers refile. This has created an upward slant to the MBA mortgage applications index. Also, the index is more heavily weighted to conventional, fixed-rate mortgages. Indeed, subprime, Alt-A and jumbo mortgage applications have dropped almost 40% in the middle two weeks of August, which has not drastically impacted the overall index.
THURSDAY, August 30th
Long term mortgage rates continued to slide this week but short term mortgage rates increased sharply as the mortgage market continues to mirror the volatility in bond market yields. 30-year fixed rate mortgages averaged 6.45% this week compared to 6.52% last week and 6.44% a year ago according to Freddie Mac's mortgage market survey. Rates on one-year adjustable rate mortgages increased about a quarter of a percent.
Jobless claims jumped 9k to 334k for the week that ended August 25. Claims are maintaining in a new higher range that is consistent with some loosening in labor market conditions. The level of claims suggests that payroll employment for August could be weak.
FRIDAY, August 31st
Housing and the mortgage industry were the main topics in speeches made by President Bush and Fed Chairman Ben Bernanke today. The Fed Chief, in remarks to an annual symposium in Jackson Hole today, said that current conditions in mortgage finance and the housing sector will be watched closely for the impact on the broader economy and that the Fed is prepared to take action if necessary. Any developments between now and the next FOMC meeting on September 18 can affect monetary policy. Shortly after the Fed Chairman’s speech, the President outlined a plan designed to help potentially hundreds of thousands of subprime borrowers avoid foreclosure. Working with the FHA, more refinancing options, lower down payments, higher loan limits and additional tax benefits were among some of the proposed administrative and legislative initiatives. The proposed changes could help many distressed homeowners keep their homes but will likely take several months to enact.

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