Economic Highlights for the Week Ending October 26, 2007

MONDAY, October 22nd
A new week and a new attitude, as markets are now nearly fully pricing in another Fed rate cut in October. The assigned probability of about 96% is up from 33% early last week that the target fed funds rate will drop by 25 basis points to 4.50%. The fed funds contract for December is trading at a price that assumes the Fed will reduce interest rates below 4.50% by year's end.
TUESDAY, October 23rd
Strong earnings today gave traders cause for exuberance. As predicted, Apple shares easily topped estimates to climb 67%, while telephone giant AT&T increased third-quarter profit by 41 percent, borne upward by record wireless revenue and acquisition savings. On the home front, reports that mortgage lending biggie Countrywide Financial Corp. may change terms on $16 billion of adjustable-rate mortgages before the end of 2008 gave hope to borrowers facing possible foreclosure. The Dow rose 109.26 to finish at 13676.23, while the NASDAQ reached 2799.26 for a gain of 45.33.
WEDNESDAY, October 24th
The MBA mortgage applications index was unchanged for week ending October 19. A decrease of 3.1% in purchase applications was offset by a 4.0% gain in refinance applications. All eyes are upon the Fed as it prepares to meet the last of October, fueling expectations that another rate cut could change the subprime picture.
The NAR reported that existing home sales fell 8.0% last month to an annualized pace of 5.04 million units. Home sales are counted when the transaction closes so these data reflect sales initiated in August, amidst the peak of the mortgage market turmoil. September's decline, the largest so far in the current housing correction, drops the sales pace to the lowest in nearly 10 years. While further declines are expected in housing activity this year and next, on the upside, existing home sales are currently the fifth highest on record and mortgage rates remain low and stable. NAR senior economist points out problems in the mortgage market have eased in recent weeks. Conforming loans are abundantly available, pricing has improved on jumbo loans and FHA loans will help to replace subprime mortgages.
THURSDAY, October 25th
New home sales gained 4.8% in September to a seasonally adjusted annual rate of 770,000. August new home sales were revised sharply lower to an annual rate of 735,000 from the original estimate of 795,000. Despite September's rebound, sales remain very weak, down 23.3% from their year ago level.
New orders for durable goods tumbled 1.7% in September, well below an expected gain of 1.5%. A 38.7% plunge in defense orders led the weakness last month though other categories declined as well. Details in the report suggest that business investment in capital goods continues to expand but at a slower pace. Manufacturing momentum has slowed heading into the fourth quarter mainly affected by weakness in transportation orders.
Initial claims for unemployment insurance fell 8k to 331k for the week that ended October 20. Despite the drop, the level of jobless claims remains elevated suggesting a weaker pace of hiring related to widespread layoffs in the home building and mortgage lending industries.
Mortgage rates fell as the weaker than expected economic data this week pointed to slower economic growth ahead. 30 year fixed rate mortgages averaged 6.33% this week compared to 6.40% last week according to Freddie Mac's mortgage market survey.
FRIDAY, October 26th
Consumer sentiment dropped further in its final reading for October, falling to 80.9% from 83.4% in September and 82.0% mid-month. A lower expectations index score related to weaker housing, slower job growth and high oil prices led the overall decline in consumer attitudes.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 13806.70 13522.02 +284.68 or +2.11%
NASDAQ 2804.19 2725.16 +79.03 or +2.90%
WEEK IN ADVANCE
The two-day FOMC meeting with the statement due out Wednesday afternoon will dominate market action and thus the direction of interest rates in the coming week. The Fed is widely expected to cut rates by 25 basis points which should help stabilize but not entirely alleviate weakness in current housing market conditions. Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco