Economic Highlights for the Week Ending May 30, 2008

MONDAY, May 26th
MEMORIAL DAY All Markets Closed
TUESDAY, May 27th
Consumer confidence sank to a 16-year low in May, falling to 57.2% from a reading of 62.8% in April. Consumers' assessments of current and future economic conditions continue to deteriorate sharply under surging inflation expectations. Such low confidence levels along with other burdens consumers are shouldering could severely impact spending thus slowing economic growth even further.
New home sales increased 3.3% in April to a pace of 526,000, better than an expected decline to a rate of 522,000. However, sales in March were revised sharply lower to 509,000 from 526,000 in the first estimate. April's figures will be subject to revision as well because new home sales track the number of signed contracts and do not reflect the number of cancellations, which have been high because of tighter credit and tougher standards for loans. Even with the apparent rebound in April, new home sales remain quite weak. The market is showing some signs of stabilizing though in reduced inventory levels and firmer prices.
The Case-Shiller home price index fell 14.1% in the first quarter from the same quarter one year ago. It was the steepest drop in home prices since the inception of the index in 1988. The largest declines were in the Las Vegas, Miami and Phoenix markets.
WEDNESDAY, May 28th
The MBA mortgage applications index fell 4.6% to 593.3% for the week ending May 23. Total mortgage application volume is down 6.8% from its year ago level. The purchase index edged 0.1% higher as the refinance index tumbled 8.9%. Purchase applications remain 17.4% below its year ago level indicating sluggish home buying demand while refinancing activity continues to be hampered by interest rates.
Durable goods orders fell 0.5% in April compared to expectations for a 2.0% decline. The gain was led by demand for electrical equipment though orders for primary metals, machinery and defense goods also increased strongly. Orders for non-defense capital goods excluding aircraft, a proxy for business investment rose 4.2% last month, signally a pocket of strength in otherwise sluggish economic conditions.
A Fed official hinted, in prepared remarks today that a rate hike may not be far off. Indeed, fed funds futures traders are pricing in a 73% chance of a quarter point bump in December. The economic data in the meantime will help determine the timing of policy reversal.
THURSDAY, May 29th
Growth was a tad better in the first quarter according to the preliminary estimate of GDP. The economy grew at a 0.9% pace in Q1 compared to advance estimate of 0.6% growth. A measure of economy-wide inflation remained unchanged at 2.6% last quarter.
Jobless claims rose 4k to 372k for the week ending May 24. Claims levels are consistent with a high pace of layoffs however they are not accelerating. Also, claims data suggest that job creation remains weak
Mortgage rates drifted higher this week over increasing expectations that the Fed may need to raise rates sooner rather than later to tame inflationary pressures. Also, recent economic data suggests the economy is not as weak as anticipated by the financial markets. 30-year fixed rate mortgages averaged 6.08% this week compared to 5.98% last week according to Freddie Mac's mortgage market survey.
FRIDAY, May 30th
Personal income rose 0.2% in April led strong transfer payments such as rental income. Wage and salary growth actually declined on the month. Consumer spending increased 0.2% last month, as expected, but has declined sharply in the last three months reflecting slower economic conditions. The core PCE price index, a favorite inflation measure for the Fed, rose a mild 0.1% on the month and 2.1% on the year, which is just over the Fed’s implicit target for core inflation.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 12638.32 12479.63 +158.69 or +1.27%
NASDAQ 2522.66 2444.67 +77.99 or +3.19%
WEEK IN ADVANCE
With the Fed presumably on hold, the economic data coming in a bit better than expected and inflationary pressure in play interest rates are facing upward pressure in the weeks ahead. The economic story has largely been better but still weak which should keep a lid on rates climbing too far, too fast.

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

Economic Highlights for the Week Ending May 23, 2008

MONDAY, May 19th
The Fed is expected to hold rates steady until the inflation outlook can be sorted out. Fed funds futures traders are pricing in an 80% probability the Fed will hold the fed funds target at its current level of 2.0% at the June meeting. The hope is that policy stimulus in the pipeline will help restore solid economic growth but in the meantime, slower economic growth will help to curtail inflationary pressures. The Fed will need some time to observe this happening and confirm it through the economic data.
The index of leading economic indicators rose 0.1% in April better than expected. Like a lot of economic data recently, the LEI is signaling that economic activity has stalled, but not collapsed and that recovery may still take a while. The level of the index is consistent with continued sluggish growth over the next six to nine months.
TUESDAY, May 20th
The producer price index increased 0.2% in April less than an expected gain of 0.4% as food and energy costs subsided during the month. Over the last year, producer prices have increased 6.4%, one of its fastest paces in the past 25 years. Excluding food and energy prices, the core PPI jumped 0.4% last month and gained 3.0% over the last year. A temporary reprieve in catapulting food and energy costs brought underlying price pressures to bear from earlier stages of processing. Upward price pressures from food and energy are expected to resume in the months ahead.
WEDNESDAY, May 21st
The MBA mortgage applications index fell 7.8% to 621.6% for the week ending May 16. The purchase index fell 6.9% on the week and remains 19.5% lower than its year ago level. The refinance index tumbled 8.7% last week but is up 2.6% over last year. Mortgage rates have yet to respond to substantial Fed easing. Stubborn rates combined with falling home values, tighter credit and weak economic conditions have crimped loan demand and dried up many refinancing opportunities. It appears the housing market is still searching for a bottom.
The minutes from the April 29-30 FOMC meeting showed that the quarter point cut at that time was a close call and future cuts would be unlikely even if the economic conditions worsened. Policy makers then turned their attention to financial markets and inflation as the primary drivers of policy decisions. Accompanying the release of the meeting minutes was the latest Fed forecast which projected even slower growth and higher inflation and unemployment. Growth for 2008 is expected to be between 0.3% and 1.2% down from 1.2% to 2.0% previously, unemployment was forecast to be between 5.5% and 5.7% up from 5.2% to 5.5% earlier and inflation was projected to rise between 3.1% and 3.4% from 2.1% to 2.4% originally.
WEDNESDAY, May 21st
Long term mortgage rates eased somewhat on a couple of weaker-than-expected economic reports last week. Consumer sentiment dropped to a multi-decade low while industrial output declined sharply. 30-year fixed rate mortgages averaged 5.98% this week compared to 6.01% last week according to Freddie Mac's mortgage market survey. Short term mortgage rates were a bit higher on average related to expectations that Fed is done cutting rates for now.
Jobless claims fell 9k to 365k for the week ending May 17. Initial claims have leveled off in recent weeks indicating a stable, but elevated pace of layoffs. Continuing claims continue to trend higher indicating weak job creation. Jobless claims data suggest another weak employment report for May, due to be released June 6.
FRIDAY, May 23rd
Existing homes sales fell 1.0% in April to an annualized pace of 4.89 million compared to expectations for a larger decline to a rate of 4.85 million according to the National Association of Realtors. Sales declines have slowed recently indicting still weak but stable housing market conditions. Lower prices and low interest rates are stimulating sales increases in some areas, reports the NAR.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 12479.63 12986.80 -501.17 or -3.90%
NASDAQ 2444.67 2528.85 -84.18 or -3.32%
WEEK IN ADVANCE
In the week ahead, inflation remains the key to the interest rate outlook. Some of the economic data and Fedspeak will address inflation concerns while the financial markets will continue to battle with rising oil prices and their impact on the economy and inflation.
Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco

Economic Highlights for the Week Ending May 16, 2008

MONDAY, May 12th
It looks like the Fed will be on hold for the next few meetings. Fed funds futures traders are pricing in roughly an 85% probability the fed funds rate target will remain unchanged at 2.00% following the June 25 FOMC meeting. With policy currently accommodative, the Fed believes they have addressed growth conditions for now. Inflation remains a concern though and further lowering of rates could exacerbate price pressures.
TUESDAY, May 13th
Retail sales fell 0.2% in April as expected. Weak motor vehicle & parts sales led the decline last month. Sales at gas stations also fell, despite higher prices. Excluding autos, retail sales jumped 0.5% on surprising gains at building supply and electronics and appliance stores. Excluding autos and gas, core retail sales gained 0.6% on the month. Despite the strength in core retail sales, consumer spending has been trending lower and is expected to remain weak going forward.
Import prices jumped 1.8% in April, largely in line with expectations. Petroleum prices once again led the advance though food prices boosted import costs as well. Excluding petroleum, import prices still rose 1.1% on the month showing a transfer of percolating inflationary pressures from abroad to the domestic economy.
The National Association of Realtors reported that the national median house price fell 7.7% in Q1 from the same period one year ago and was down 4.6% from Q4. That was the largest year-over-year drop in home prices since the NAR started tracking them in 1982. The national median sales price now stands at $196,300, the first time below 200k since the onset of the housing bubble 5 years ago.
WEDNESDAY, May 14th
The consumer price index increased 0.2% in April, a bit lower than an expected 0.3% gain. A 0.9% jump in food prices fed the gain as energy prices remained, surprisingly unchanged on the month. Excluding food and energy prices from the index, the core CPI rose just 0.1% to bring the yearly gain to 2.3%. Consumer inflation is somewhat higher than the Fed would like to see however it appears to be easing mildly under weak economic conditions.
The MBA mortgage applications index rose 2.9% to 674.4% for the week ending May 9. The purchase index fell 0.7% on the week and is down 12.4% from one year ago. The refinance index jumped 6.5% on a weekly basis and is up 14.5% its year ago level. Low rates are boosting refinance activity while falling home values are deterring prospective home buyers, thus weighing on purchase application volumes.
THURSDAY, May 15th
The NAHB housing market index fell to 19 in May from a level of 20 in April. Already at a severely depressed level, it was disheartening to observe another drop in sentiment. All three components of the index, ratings of present sales, sales six months from now and buyer traffic moved lower on the month. Builder sentiment remained mired at a low point as falling home values and tougher lending standards continue to deter buyers and curb demand.
Industrial production fell 0.7% in April, more than double expectations for a 0.3% decline. Sharp drops in mining and manufacturing output led to the large decline in overall production. Utility production gained on the month. The amount of capacity used for production fell sharply as well to 79.7% from 80.4% previously. Easing capacity utilization rates indicate some slack in resource usage, which will help to lower inflation.
FRIDAY, May 16th
Housing starts increased 8.2% in April to an annual rate of 1.032 million compared to an expected decline to a pace of 935k. After falling in March to their lowest level since 1991, starts unexpectedly rebounded in April. It is good to see starts over the million mark again; however they remain quite weak. High inventory levels compounded by weak new home sales and low home builder sentiment will keep new construction activity in the cellar for a while longer.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 12986.80 12745.88 +240.92 or +1.89%
NASDAQ 2528.85 2445.52 +83.33 or +3.41%
WEEK IN ADVANCE
There are a couple of hurdles in the week ahead on an otherwise light economic calendar. The producer price index on Tuesday is the next major inflation reading. Inflation remains the key to the current on-hold stance for the Fed. Also, existing home sales, due out Friday will relay the latest data from the housing sector.
Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco

Economic Highlights for the Week Ending May 9, 2008

MONDAY, May 5th
The ISM non-manufacturing index increased to 52.0% in April from a reading of 49.6% in March. This was the first reading above the key 50% level in four months suggesting expansion in the service industries. A pickup in employment last month is consistent with stronger demand. Nevertheless, service sector activity is trending lower over the long term in part related to the downturn in residential construction and turmoil in mortgage finance industries.
TUESDAY, May 6th
Financial markets expect the Fed to hold off on any other rate adjustments at this time but the question remains “for how long?’ Fed funds futures traders are pricing in just a 15% chance of another rate cut in June. Sentiment is clearly weighted toward no change in rates and for an extended period of time. December futures contracts are priced for the current 2.00% fed funds target rate implying no change in rates for the remainder of this year. Traders are fully pricing in a rate hike to 2.25% in February of next year, of course rate expectations will fluctuate between now and then as new information becomes available.
WEDNESDAY, May 7th
Nonfarm business productivity increased at a strong 2.2% annualized pace in the first quarter, up from 1.8% in Q4. This was well above estimates for a 1.5% rate of growth. Nonfarm unit labor costs rose at a 2.2% annual pace in Q1, slightly less than expected. These data indicate solid productivity growth, despite weaker economic conditions and without associated wage inflation.
Consumer credit increased by $15.3 billion in March, or at a 5.9% annual rate. Revolving credit rose by $6.3 billion as consumers used credit cards to fund consumption. Non-revolving credit shot $9.0 billion higher, which was surprising given anemic auto sales. Expect consumer credit to continue growing at a fairly robust pace, due to sharp declines in mortgage equity withdrawals.
The MBA mortgage applications index jumped 15.6% to 655.4% for the week ending May 2. Despite the gain, total application activity remains 3.7% below last year’s level. The purchase index gained 12.1% on the week but is down 13.0% from one year ago. The refinance index climbed 19.3% this week and is up 7.5% from last year. Lower rates should continue to support application activity going forward.
The pending home sales index dropped 1.0% in March to a level of 83.0, after a reading of 83.8 in February, the NAR reported today. The index remains 20.1% lower than its year ago level. Economists at the NAR forecast flat home sales activity over the next several months with some chance for a pickup in sales activity over the summer, which hinges on the accessibility of more affordable loans.
THURSDAY, May 8th
Chain store sales rose 3.6% in April, much higher than expected, boosted largely by calendar effects related to an early Easter. Wholesale clubs, department, drug and discount stores all posted solid gains last month while sales at furniture and apparel shops declined. Higher gas prices contributed to the sales gains as well. The outlook for spending remains weak going forward with some offset expected to be provided by tax rebate checks currently being sent to consumers.
Jobless claims fell 18k to 365k for the week ending May 3. Despite the decline last week, the level of claims remains elevated which means a large number of layoffs. Moreover, continuing claims have been trending higher over the last two years indicating sluggish job creation and making it difficult for laid off workers to find new jobs.
FRIDAY, May 9th
The international trade deficit narrowed sharply in March while February’s trade gap was less than first reported. The trade deficit dropped to $58.2 billion in March following a $61.7 billion gap in February. The trade picture improved on a $6.1 billion decline in imports related to a weaker domestic economy. Exports also declined on the month, by $2.6 billion, but continue to trend higher due to a weak dollar. The trade gap reduction in March will end up contributing as much as 0.6 percentage points to Q1 GDP growth in the next revision.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 12745.88 13058.20 -312.32 or -2.39%
NASDAQ 2445.52 2476.99 -31.47 or -1.27%
WEEK IN ADVANCE
Economists and financial markets will be looking to a host of data releases in the coming week to provide further confirmation that the recession will be short and shallow, with modest inflationary pressures.
Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco

Economic Highlights for the Week Ending May 2, 2008

MONDAY, April 28th
The FOMC policy statement and data flows this week should go a long way toward firming up the economic and interest rate outlook.
TUESDAY, April 29th
The consumer confidence index fell to 62.3% in April from an upwardly revised reading of 65.9% in March. This is the lowest index level since October 1993 with the exception of March 2003 at the start of the Iraqi war. Confidence levels remain very weak and face downside risks going forward given sluggish job creation, higher energy costs, falling home values and tighter credit.
The S&P/Case-Shiller 10-city and 20-city house prices indexes showed further depreciation of home values in February. The 10-city composite index fell 2.9% month-over-month and is down 13.6% year-over-year. The 20-city index fell 2.7% on the month and remains 12.7% lower over the past year. Yearly declines are the highest on record. In addition, price declines appear to be accelerating.
WEDNESDAY, April 30th
GDP grew at a 0.6% rate in Q1 compared to expectations for a 0.2% pace. Over the past year, the economy expanded at a 2.5% rate. Inventory investment was a positive contributor to growth during the quarter while residential investment, consumer spending and stronger imports proved to be detractors. While growth was mildly positive in Q1, data suggests there is little momentum heading into Q2. The GDP price index, an economy-wide measure of inflation and a mainstay for the Fed, increased 2.6% in Q1. The price index continues to ease from its cyclical peak of 3.4% registered in Q405.
The FOMC cut rates by 25 basis points today, as widely expected. The target for the fed funds rate now stands at 2.0%. This is the seventh policy easing for a cumulative 3.25 points since September. Given substantial easing to date, the removal of the phrase “downside risks to growth remain” from the statement and inflationary risks, experts believe that this may be an end to the Fed’s rate cutting campaign.
The MBA mortgage applications index tumbled 11.1% to 567.0% for the week ending April 25. The purchase index declined 4.8% on the week and is down 20.4% from a year ago. The refinance index plunged 16.7% on a weekly basis but remains 5.5% higher than its year ago level. The jump in mortgage rates last week probably produced the steep drop-off in application activity; also recent news of declining home values could be impacting application activity.
THURSDAY, May 1st
The ISM manufacturing index was unchanged in April at 48.6%. The better-than-expected index reading remains below the key 50% level indicating contraction in nationwide manufacturing activity. The index is not low enough though to suggest that the overall economy is in recession. Despite slow activity, input price pressures continued to rise.
Personal income rose 0.3% in March as personal spending increased 0.4%. Ongoing job losses threaten to weaken both income and spending growth going forward. An inflation gauge in this data series, the core PCE deflator increased 0.2% on the month and was up 2.1% over the past year, slightly above the Fed’s implicit comfort zone for inflation.
Jobless claims jumped 35k to 380k for the week ending April 26. The gain in initial claims more than reverses a 30k decline in claims levels in the previous week. Longer term averages also remain elevated suggesting another decline in payroll employment for April due to increased layoffs and weaker hiring.
FRIDAY, May 2nd
The economy shed 20,000 payrolls in April, much less than an anticipated decline of 75,000. Jobs losses stemmed from manufacturing and construction industries. A sharp gain in service sector payrolls led to less-than-expected losses last month. The unemployment rate slipped to 5.0% of the workforce. While labor conditions are a long way from being healthy, they appear to be improving which supports expectations for rate cut pause.
FRIDAY, May 2nd
The economy shed 20,000 payrolls in April, much less than an anticipated decline of 75,000. Jobs losses stemmed from manufacturing and construction industries. A sharp gain in service sector payrolls led to less-than-expected losses last month. The unemployment rate slipped to 5.0% of the workforce. While labor conditions are a long way from being healthy, they appear to be improving which supports expectations for rate cut pause.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 13058.20 12891.86 +166.34 or +1.29%
NASDAQ 2476.99 2422.93 +54.06 or +2.23%
WEEK IN ADVANCE
The economic calendar is very light in the week ahead and contains mostly second-tier data releases. Also, the Treasury conducts its quarterly refunding, auctioning $15 billion in 10-year notes Wednesday and $6.0 billion in 30-year bonds Thursday. New supply in the bond market could result in weaker demand, thus raising yields.
Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco