Economic Highlights for the Week Ending October 5, 2007

MONDAY, October 1st
Rate cut expectations remained unchanged since last week however they are leaning toward two more rate cuts this year, at the October and December meetings. Fed funds futures traders are pricing in a 74% chance of a quarter point rate cut at the end of this month and 54% odds of another one December 11.
The ISM manufacturing index fell to 52.0% in September compared to expectations for a slightly smaller decline to 52.5%. This is the third straight monthly decline in the index leaving it at a level that is consistent with only modest growth in the manufacturing sector.
TUESDAY, October 2nd
September motor vehicle sales dropped slightly from August to an annual rate of 16.2 million units. Car sales improved while light truck sales dipped slightly. However indications point to sales for the year falling to their lowest pace since 1998. There is downward pressure on vehicle sales due to eroding credit quality and a paucity of available home equity that could be used for new vehicle purchases.
The NAR’s pending home sales index fell to 85.5 in August, a decline of 6.5% from July and down 21.5% from a year ago. The index tracks the number of signed contracts that have not yet closed and is considered a leading indicator of existing home sales. Housing demand is expected to remain weak under deteriorating credit conditions and tighter lending standards.
WEDNESDAY, October 3rd
The ISM non-manufacturing index fell a point to 54.8% in September, matching expectations. Service industry employment gained last month, surprising given that construction, mortgage and financial services are included in the sector, while prices accelerated. The index level is consistent with moderate expansion in the service sector, though on a trend basis, growth is mildly slower.
The MBA mortgage applications index fell 2.7% to 636.7%. The purchase index slipped 1.8% on the week as the refinance index dropped 3.8%. On the whole, mortgage application volumes remain little changed from their year ago level. Those seeking home financing / refinancing may be waiting for lower rates to kick in before submitting an application. As rates move lower expect the mortgage applications to increase.
THURSDAY, October 4th
After rising for three straight weeks, long term mortgage rates eased slightly this week as credit woes and the housing market correction weakened the economic outlook. 30-year fixed rate mortgages averaged 6.37% this week compared to 6.42% last week according to Freddie Mac's mortgage market survey.
Jobless claims rose 16k to 317k for the week ending September 29. Initial claims have averaged 318k a week so far in 2007 compared to 313k a week in 2006. Below trend job growth is expected to continue in the months ahead.
FRIDAY, October 5th
Payroll employment jumped 110k in September, a bit better than expected. Moreover, the 4k decline in August was upwardly revised to show a gain of 89k jobs. Even with the measurable improvement in the last two months, job creation continues to trend lower. Payrolls are being added at roughly half of last year's pace, related to but not entirely due to the housing market correction and financial market turmoil. The unemployment rate edged higher last month to 4.7% of the workforce, also a reflection of a slower pace of job creation.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 14066.01 13895.63 +170.38 or +1.23%
NASDAQ 2780.32 2701.50 +78.82 or +2.92%
WEEK IN ADVANCE
September payrolls and revisions to August job tallies bring some intrigue to the next FOMC rate adjustment. A rate cut at the end of this month is not a done deal. Economic data between now and the end of the month will continue to shape the interest rate outlook. The economic calendar is back loaded in the coming week with retail sales and producer prices on Friday the main market movers.

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