Week In Review

[Adam in CO]

Volume 12, Number 46 Economic Highlights for the Week Ending December 15, 2006

Monday, December 11th Stronger than expected payroll gains in November prompted the financial markets to pullback on rate cut expectations for next year. Fed funds futures traders are pricing in a very slim chance of a rate cut following the FOMC meeting at the end of January and odds of just 24% for an easing in March, down from about 70% earlier last week.

Tuesday, December 12th The FOMC opted to hold monetary policy steady today, as widely expected, leaving the target for the fed funds rate unchanged at 5.25%. This is the fourth straight meeting the Fed has remained on hold. In the policy statement the committee acknowledged that recent economic data have been mixed and that the correction in the housing market has been substantial. Policymakers believe though, that the economy will continue to expand at a moderate pace going forward. The Fed said they still see elevated core inflationary pressures but that reduced energy prices, low inflation expectations, and previous tightening should help to contain inflation over time. As risks do remain, the FOMC stated that they would raise rates again if incoming data deemed it necessary.

Wednesday, December 13th Retail sales surged 1.0% in November led by strong demand for electronics and appliances, building materials, gasoline and autos. Excluding the large and often volatile auto and gas segments, retail sales still gained 0.9%. A strong start to the holiday shopping season should provide a lift to Q4 economic growth as well. The MBA mortgage applications index jumped 11.4% to 721.2% for the week that ended December 8. Purchase activity was up 8.7% on the week while refinancing application volumes soared 15.8%. Purchase apps remain 3.0% below their year ago levels but refinancing applications are up an astounding 59.8% primarily due to homeowners converting their adjustable rate mortgages and locking in fixed rates. Refinancing activity is up but surprisingly not all ARM holders want to convert into a fixed rate mortgage. According to CNN Money, some people are considering interest only and payment option loans instead because they may not be able to afford a higher, fixed rate. While those types of financing may be good in some circumstances, mortgage professionals say there is a window of opportunity now because of a recent dip in average fixed rates. One-year ARMs currently average 5.43% while 30-year fixed rates are averaging just 6.11% according to Freddie Mac's mortgage market survey.

Thursday, December 14th Import prices rose 0.2% in November despite another drop in petroleum prices, which fell 1.6% on the month. Crude oil prices have risen since the data was collected and will result in higher import prices in December. Mortgage rates edged slightly higher this week on recent economic reports for November showing stronger job creation and retail sales. 30-year fixed rate mortgages averaged 6.12% this week compared to 6.11% last week according to Freddie Mac's mortgage market survey. Historically low mortgage rates last week pushed mortgage application volumes to their highest levels this year. Jobless claims tumbled 20k to 304k for the week that ended December 9. Initial claims have regained their previous low level which suggests relatively tight labor market conditions with moderate monthly payroll gains. Jobless claims have averaged 312k a week this year compared to 332k a week in 2005.

Friday, December 15th Consumer prices were unchanged in November, less than estimates for a 0.2% gain. A 0.2% decline in energy costs helped to stabilize overall prices last month. The CPI has gained 2.0% over the past year. Excluding food and energy from the index core consumer inflation was also unchanged in November. Over the past year, the core rate has run at a 2.6% pace. Certainly with inflation well contained the Fed will not be compelled to raise rates, as alluded to in the last policy statement. Industrial production increased 0.2% in November, slightly better than expected. Gains in manufacturing output offset declines in mining and utilities. Capacity utilization rates remained unchanged last month at 81.8%. Despite the gain last month, industrial activity continues to slow along with usage rates. Slower resource utilization will help to ease pricing pressures going forward.

Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 12445.52 12307.49 +138.03 or +1.12%
NASDAQ 2457.20 2437.36 +19.84 or +0.81%


WEEK IN ADVANCE The inflation outlook is improving as we head into 2007 which potentially means continued low interest rates. This week's economic calendar provides more data on the inflation front as well as home building, manufacturing and consumer attitudes.

Key Interest Rates
Latest 6 Mos Ago 1 Yr Ago
Prime Rate 8.25% 8.00% 7.07%
Fed Discount 6.25% 6.00% 5.07%
Fed Funds 5.31% 5.00% 4.19%
11th District COF 4.346% 3.759% 3.074%
10-Year Note 4.59% 5.05% 4.49%
30-Year Treasury Bond 4.71% 5.09% 4.65%
30-Yr Fixed (FHLMC) 6.12% 6.63% 6.30%
15-Yr Fixed (FHLMC) 5.86% 6.25% 5.85%
1-Yr Adj (FHLMC) 5.45% 5.66% 5.15%
6-Mo Libor (FNMA) 5.3495% 5.3215% 4.5795%

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

[KenP]

Another nice report. I wonder how many we'll have under the Dems regime....