Economic Highlights for the Week Ending October 19, 2007

MONDAY, October 15th
Rate cut expectations have shifted due to a recent raft of strong indicators. Current implications are that the Fed will remain on hold at the October 30-31 meeting. Fed funds futures traders are pricing in a 70% probability the fed funds target will remain unchanged, up from a 40% chance in early October and 10% odds in early September. However, markets are expecting one more rate cut by the end of 2007.
The Creditforecast.com Quarterly Household Credit Report showed further deterioration in credit quality as borrowing moderated in Q3. Evidence that only a portion of consumers are affected by credit problems is the fact that the Equifax risk score national average fell 0.9 points in Q3 to 698.6, virtually unchanged from last year.
TUESDAY, October 16th
Industrial Production rose 0.1% in September, while the 0.2% increase in August was scaled back to unchanged. The data indicate that manufacturing and business equipment production rose at a healthy pace in the third quarter with moderate momentum heading into Q4.
The NAHB October Housing Index, a measure of homebuilder optimism, was down 2 points to 18, a cumulative drop of 18 points since March and the lowest rating since the index was inaugurated. The index is down in every component and at its regional lowest in the western United States. Builders, faced with tightening credit, a surfeit of inventory and anemic sales, will put off starts in the coming months. Residential investment is expected to subtract from GDP growth through the first half of 2008.
WEDNESDAY, October 17th
The Consumer Price Index rose 0.3% in September, higher than an expected gain of 0.2%. Consumer inflation is up 2.8% over the past year. Excluding the often volatile food and energy categories from the index, core consumer prices gained 0.2% on the month, in line with expectations and 2.1% on the year. With inflation in check, future Fed policy actions will lean more toward how economic growth is impacted by the housing market and credit conditions.
New residential construction put in place in September plummeted 10.2% to an annualized pace of 1.19 million. Lower than expected Housing Starts were led by a 34% decrease in the multifamily sector. Single family starts fell 1.7%.
The MBA Mortgage Applications Index rose 0.7% to 656.3% for the week that ended October 12. Total applications are 12.0% above their year ago level. The purchase index gained 2.1% on the week while refinancing applications dropped 1.1%. Application activity will likely remain range bound until the Fed meets at the end of the month.
The Fed's round up of activity in the twelve Federal Reserve Banking Districts known as the beige book showed the economy continued to expand in September and early October, but that the pace of growth moderated in many areas. The anecdotal evidence in this survey proffered little to clarify future monetary policy. Economists and financial markets remain spilt about the Fed’s next rate move.
THURSDAY, October 18th
Mortgage rates were flat to slightly higher this week as the financial markets tried to decipher the Fed's next move amid a mixed bag of economic indicators. 30-year fixed rate mortgages averaged 6.40% this week the same as last week according to Freddie Mac's mortgage market survey.
Jobless Claims jumped 28k to 337k for the week that ended October 13. The surge in initial claims indicates softer labor market conditions with an increased pace of layoffs. Hiring has also been weak. October payrolls are likely to come in under 100k when reported on the first Friday in November.
FRIDAY, October 19th
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 13522.02 14081.05 -559.03 or -3.97%
NASDAQ 2725.16 2800.12 -74.96 or -2.67%
WEEK IN ADVANCE
Housing indicators dominate the economic calendar in the coming week with exiting home sales on Wednesday and new home sales due out Thursday. The Fed believes the housing sector and subsequent credit woes remain some of the central risks to the economy. Further weakness in home sales would tip the scales in favor of another rate cut.
Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco