Economic Highlights for the Week Ending December 14, 2007

MONDAY, December 10th
The pending home sale index, a leading indicator of existing home sales that tracks the number of signed contracts in a given month, increased 0.6% in October to 87.2 from a reading of 86.7 in September. It was the second straight monthly gain however the index remains 18.4% below the index level of 106.8 in October last year. The NAR’s chief economist predicts that existing home sales will rise gradually in 2008 over exceptionally low levels in the final months of 2007.
TUESDAY, December 11th
As widely expected, the FOMC cut key, short-term interest rates by 25 basis points at their policy-setting session today. This was the third consecutive cut in the fed funds target which now stands at 4.25%. The Board also approved a 25 basis point decrease to 4.75% in the discount rate. In the policy statement, the Fed cited slower growth related to the housing market correction and increased financial market strains as reasons for easing.
WEDNESDAY, December 12th
Import prices jumped 2.7% in November led by a 9.8% surge in petroleum prices. Over the past year oil prices have soared by 53.0%, pushing overall import prices up 11.4%. Non-petroleum import prices climbed 0.7% on the month and were up 3.0% over the past year. Outside of energy, imported goods inflation remains moderate but is still placing upward pressure on both producer and consumer prices.
The international trade deficit widened to $57.8 billion in October from a downwardly revised deficit of %57.1 billion in September. For the first 10 months of this year, the trade deficit has averaged $58.6 billion compared to a monthly average trade deficit of $64.0 billion in 2006. Robust export growth, related to strong global economies and a weak dollar is responsible for the improvement in the trade picture.
The MBA mortgage applications index rose 2.5% to 811.8% for the week ending December 7. This follows a 22.5% advance in the previous week. The applications index is at its highest level since mid-2005. The purchase index increased 1.7% on the week while the refinance index rose 4.3%. The refinance share of mortgage applications was 59% of the number and 58% of the dollar volume. Falling mortgage interest rates will continue to support application activity going forward.
One day after the Fed eased monetary policy and disappointed financial markets with their policy statement, the Federal Reserve announced a plan to increase liquidity into global money markets. The Fed will lend at $40 billion in two separate auctions this month with the size of two more auction to be determined next month, at rates far lower than discount rate. The discount rate is the rate at which the Fed loans money overnight directly to banks. Other major central banks will hold auctions similar to the Fed’s and be able to make loans in dollars instead of other much stronger currencies. The hope is that it will relieve pressure on interbank lending rates, especially the Libor.
THURSDAY, December 13th
Retail sales jumped 1.2% in November nearly double expectations and helped by colder weather, an early Thanksgiving and sharply higher gasoline prices. Consumers remain quite resilient in the face of the housing correction and higher energy prices. Spending will likely decelerate this quarter from a robust third quarter pace however it will not be excessively weak, much to the relief of financial markets.
The producer price index surged 3.2% in November driven higher almost entirely by energy prices, which rose 14.1%. This is the second highest reading since the index was started in 1973. Excluding food and energy prices from the index, core producer prices gained a 0.4% last month, which was still a bit above trend. Over the past year the PPI was up 7.7%, its highest level in over 25 years, while the core PPI gained just 1.9%, considered by the Fed the safety zone for wholesale inflation.
FRIDAY, December 14th
The consumer price index soared 0.8% in November compared to expectations for a 0.6% increase. Higher energy prices were once again behind the larger than expected gain in headline consumer prices last month. Excluding food and energy prices core consumer inflation rose 0.3% on the month and gained 2.3% on the year. The yearly gain is higher than the Fed would like to see but inflationary pressures should soften in the near term under slower economic growth.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 13339.85 13625.58 -285.73 or -2.10%
NASDAQ 2635.74 2706.16 -70.42 or -2.60%
WEEK IN ADVANCE
In the coming week market players will be looking at further developments in the financial services industry; oil prices and other issues that could affect consumer spending and data from the housing sector: homebuilder sentiment and housing starts.
Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco