Economic Highlights for the Week Ending April 25, 2008
MONDAY, April 21st
The size of the next rate cut has been pared back amid better than expected economic readings and improved financial market sentiment related to earnings and the belief that the worst of the credit crisis has passed. Fed funds futures traders are fully pricing in a quarter point rate cut at the conclusion of the two-day FOMC meeting. That would target the fed funds rate at 2.0%.
TUESDAY, April 22nd
Existing home sales fell 2.0% in March to an annual rate of 4.93 million units, in line with market expectations. NAR economists state that sales activity, while uneven at times, has remained within a narrow range since last September, indicating stable but still weak conditions. Support will come in the form of more policy measures, continued low rates and fiscal stimulus later in the year to help offset downside risks of a more severe economic downturn and raucous financial market turmoil.
The Fed has used other tactics besides easing monetary policy to address the credit crisis. One of them, the Term Auction Facility or TAF, which makes 28-day credit available to banks, took place today and drew stronger demand than the first TAF indicating the need for liquidity amid still critical credit market conditions. More lending facilities may be created in an effort to lower interbank lending rates and encourage banks to lend to one another.
WEDNESDAY, April 23rd
The MBA mortgage applications index fell 14.2% to 637.6% for the week ending April 18. The purchase index fell 6.4% on the week as refinancings dropped 20.2%. The decline in application volumes was due to tighter credit, and a substantial jump in mortgage rates.
While a quarter point rate cut is widely expected by the FOMC at their meeting next week, analysts and some economists believe that holding steady on rates would accomplish more for the Fed. It would surprise the markets; help establish the Fed’s inflation fighting credibility, could reverse some of the recent gains in commodity prices and bolster the dollar. The argument is that because rates have fallen so low investors have been buying commodities; that combined with much stronger global demand and industrialization has resulted in what many are calling a commodities bubble.
THURSDAY, April 24th
New home sales plunged 8.5% in March to an annualized pace of 526,000, much weaker than an expected pace of 580,000. The sales plunge in March combined with downward revisions in previous months makes the first quarter the worst yet for the housing downturn. Given the high inventory level and weakened demand, declines are expected to continue in the housing sector through this year though, at a gradually diminishing pace.
Jobless claims fell 33k to 342k for the week ending April 19. Even with the weekly drop, the level of claims remains elevated. In 2007, initial claims averaged 322k; thus far in 2008 claims have averaged 353k. Claims and their longer term averages suggest acceleration in the pace of layoffs and a downward trend in the pace of hiring.
Diminished rate cut expectations combined with scattered inflationary pressures have recently raised yields in the bond market which in turn resulted in higher mortgage rates this week. 30-year fixed rate mortgages averaged 6.03% this week compared to 5.88% last week according to Freddie Mac’s mortgage market survey.
FRIDAY, April 25th
Consumer sentiment dropped to 62.6% in April, a 26-year nadir, from 63.2% in mid-April and 69.5% in March. Consumers seem equally anxious about present and future economic circumstances. Sentiment is mired at a level that historically has been associated with recession. Downside risks to consumer attitudes remain in the form falling house prices, high energy prices, sluggish job growth and tighter credit.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 12891.86 12849.36 +42.50 or +0.33%
NASDAQ 2422.93 2402.97 +19.96 or 0.83%
WEEK IN ADVANCE
The economic calendar is busy again in the coming week and provides the advance estimate for Q1 GDP as well as the first readings on payrolls, manufacturing and consumer spending starting off the second quarter. Also, the FOMC holds a two-day policy meeting, where a quarter-point rate cut is widely expected. The policy statement is due out Wednesday afternoon.
Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco

Economic Highlights for the Week Ending April 4, 2008
MONDAY, March 31st
With some relief in terms of inflationary pressure and continued signs of pervasive weakness, financial markets fully expect the FOMC to continue trimming rates in the near future. Fed funds futures traders are fully pricing in a quarter-point rate cut to 2.0% at the conclusion of the Fed’s two-day meeting, April 29-30. Traders ascribe a 75% chance the rate cut will be a half point.
TUESDAY, April 1st
The ISM manufacturing index rose to 48.6% in March from a reading of 48.3% in February. These data bested expectations for a small decline. However, this is the third reading below the key 50% level in the last four months indicating contraction national manufacturing conditions. Despite the contraction input prices remain stubbornly high. With business investment softening and consumer confidence faltering, demand is expected to be subdued with corresponding weak manufacturing production in the months ahead.
Construction spending fell 0.3% in February as January’s decline was revised to be much smaller. Construction spending has fallen for five straight months due to weakness in the residential sector where expenditures dropped 0.9% in February, the 24th consecutive monthly decline, and remain 18.8% lower over the past year.
WEDNESDAY, April 2nd
Motor vehicle sales fell 1.7% in March to an annualized pace of 15.1 million units. This was the slowest sales pace since October 2005. Auto sales were higher while truck sales dropped because of gas mileage considerations. Vehicle sales are likely to remain weak as house price declines, sluggish job growth, tighter credit and higher gas prices curtail consumer spending, especially for big-ticket items.
The MBA mortgage applications index plunged 28.7% to 688.3% for the week ending March 28. This reversed a substantial portion of last week’s 48.1% surge. Nevertheless, total mortgage application volumes are still 6.0% above their year ago level. The purchase index fell 11.8% on the week and is down a similar 11.6% from one year ago. Refinance applications dropped 38.1% from the previous week but remain 25.6% above their year ago level. Refinance applications accounted for 53.4% of total loan applications, down from 62.0% a week earlier.
Fed Chief Ben Bernanke forecasted flat to slightly contracting growth the first half of this year with the possibility of some improvement sometime in the second half of the year in comments made to the Congressional Joint Economic Committee today. The Chairman also said that monetary and fiscal stimulus that has already taken place should be enough to support modest growth later this year suggesting the Fed may be nearing an end to their rate cutting campaign.
THURSDAY, April 3rd
The ISM non-manufacturing index increased slightly in March to 49.6% from 49.3% in February. This was the third consecutive sub-50% reading indicating mild contraction in service sector activity. Details in the data suggest moderate weakening may continue in the near term, which is consistent with the broader economic outlook.
Jobless claims jumped 38k to 407k for the week ending March 29. The surge in unemployment filings was unexpected, and raises the level of claims to the highest in 2 years since the aftermath of Hurricane Katrina. Jobless claims have been trending higher over the last year and a half indicating increased layoffs and subdued hiring amid weakened labor market conditions.
The economic readings of late while still showing weakness have not been as weak as economists have forecast. Rates drifted slightly higher this week related to better than expected data results. 30-year fixed rate mortgages averaged 5.88% this week compared to 5.85% last week according to Freddie Mac’s mortgage market survey. Economists at Freddie Mac point out though, that recession worries are keeping a lid on any large upward swings in rates right now and that rates remain at historically low levels.
FRIDAY, April 4th
Employers continued to shed jobs in March providing further confirmation of a mild recession currently taking place. Payroll employment shrank by 80,000 last month, more than expected and the biggest decline since March 2003. Moreover, the previous two months were downwardly revised to show a net loss of 67,000 more jobs. The unemployment rate jumped to 5.1% of the work force from 4.8% in February. The third consecutive month of substantial payroll declines will place pressure on Fed to continue cutting rates, perhaps more aggressively than their current outlook would warrant.
Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 12609.42 12216.40 +393.02 or +3.22%
NASDAQ 2370.98 2261.18 +109.80 or +4.85%
WEEK IN ADVANCE
Data in the coming week, which is light and mostly second-tier, takes a back seat to scheduled Fed speeches and the FOMC meeting minutes from March 18 in terms of the interest rate outlook.
Sources: IBC' s Money Fund Report; Bank Rate Monitor; Federal Home Loan Bank of San Francisco