Economic Highlights for the Week Ending January 25, 2008

MONDAY, January 21st
M.L. King, Jr. DayAll Markets Closed
TUESDAY, January 22nd
In response to increasing concerns about a U.S. recession and turmoil in domestic and global financial markets, the Federal Reserve unexpectedly cut the federal funds rate by 75 basis points today. The target for the fed fund rate now stands at 3.50%. The Fed also cut the discount rate by 75 basis points to 4.00%. This was the first three-quarter point rate reduction since 1991 and the first intermeeting cut since September, 2001. The statement released after the policy action explained that the Committee made the move because growth was slowing significantly under tighter credit conditions and the housing downturn had spilled over into softening labor market conditions. The Fed acknowledged that considerable downside risks to growth remain and that they expect inflation to continue to subside this year; however they would monitor pressures closely. This suggests the FOMC will continue to cut rates until economic data and financial market conditions improve appreciably.
WEDNESDAY, January 23rd
The MBA mortgage applications index rose 8.3% to 981.5% for the week that ended January 18. This was the highest index level since April 2004. Total mortgage applications are now 60.6% above their year ago level. Gains were once again led by refinancing applications. The purchase index declined 4.6% on the week while refinancings surged 16.9%. Application activity, especially for refinancing will continue to be supported by low rates, which are expected to drop further from here.
The markets expect more rate cuts next week, even after an outsized, between-meeting rate reduction yesterday. Fed funds futures traders are fully pricing in a half-point rate cut at the conclusion of the FOMC’s regularly scheduled 2-day policy meeting next Wednesday. Odds of another 75 basis point rate cut next week are hovering around 45%.
THURSDAY, January 24th
Existing home sales fell 2.2% in December to an annual pace of 4.89 million units. For all of 2007, existing home sales totaled 5.652 million, down 12.8% from its 2006 level and the lowest annual pace since 2002. After stabilizing somewhat early in Q4, sales have resumed a downward trend entering into this year. Given the weakness in home prices, buyers will probably wait to see an end to the downturn before wading back into the market. Home sales will remain weak in the first half of this year with price declines expected to continue as the drivers of stronger demand come back into balance under lower rates, stable credit conditions and healthy economic activity.
Jobless claims fell 1k to 301k for the week ending January 19. Expectations were for claims to rise to 320k. This is the fourth consecutive week that claims declined which has shored up the labor outlook as mildly positive. These data, combined with a decline in the 4 week average and lower continuing claims indicate a softer labor market but not a recessionary one. Economists caution that claims data is especially volatile this time of year because of the holidays and is subject to revision.
Fixed mortgage rates fell to their lowest level since 2004 this week. 30-year fixed rates averaged 5.48% this week compared to 5.69% last week according to Freddie Mac’s mortgage market survey. The average 30-year fixed rate has fallen almost three quarters of a point since the beginning of the year. Rates are likely to fall further from here which would definitely help homeowners facing resets on their adjustable rate mortgages.
FRIDAY, January 25th
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 12207.17 12099.30 +107.87 or +0.89%
NASDAQ 2326.20 2340.02 -13.82 or -0.59%
WEEK IN ADVANCE
After this week’s surprise, inter-meeting rate cut and fiscal stimulus package agreement in Washington D.C., next week’s FOMC meeting and economic indicators seem anti-climatic. Nevertheless, the policy decision and statement will be closely monitored while the data will provide the first estimate on Q4 economic growth and the latest readings on new home sales, manufacturing, consumer spending and incomes.
Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco