Week In Review

[Adam in CO]

Economic Highlights for the Week Ending October 27, 2006

Monday, October 23rd Financial markets are speculating the Fed could sound an inflation alarm that could require further rate increases. After pricing in, at the highpoint September 25, a 46% chance of a rate cut for early next year, fed fund futures traders are now pricing in 18% odds of a rate hike.

Tuesday, October 24th A $20 billion, 2-year note auction was met with strong demand today. The notes were awarded a high yield of 4.894% and received a 2.91 bid-to-cover ratio compared to 2.77 last month. Indirect bidders which include foreign central banks accounted for 31% of the accepted bids today. Treasuries drifted slightly higher in trading Tuesday as the bond market awaited additional Fed guidance tomorrow. In late trading the 10-year note was up 3/32 to 100-13/32 to yield 4.82%.

Wednesday, October 25th Existing home sales, which includes single-family, town homes, condominiums and co-ops fell 1.9% in September to an annual rate of 6.18 million. Consensus estimates were for a smaller decline to a rate of 6.26 million. Over the last year, home re-sales have declined 14.2%. While it looks as though the market has bottomed, the risks to the outlook remain to the downside. Affordability issues, overcome in the past by low interest rates and creative financing, as well as spent-up demand may continue to impede home sales going forward. The MBA mortgage applications index rose 0.5% to 588.6% for the week that ended October 20. Purchase application activity slipped 0.6% while refinancing volume rose 1.8%. Mortgage rates have climbed higher in the past few weeks and are slowing the pace of application activity. However, the current level of the MBA index suggests some stabilization in housing market conditions. The FOMC kept the target for the fed funds rate stable at 5.25% as widely expected today. This was the third straight meeting policy makers remained on hold to further evaluate the impact of the previous 17 rate hikes and other factors influencing the economic outlook. The much anticipated policy statement showed a few minor changes in the language. The Fed first acknowledged the slowing pace of economic growth this year, attributable in part to cooling in housing sector. The economy is expected to continue expanding at a moderate pace. Inflation risks do remain, but seem likely to moderate over time on lower energy prices and previous policy adjustments. The Committee left the door open for additional firming if necessary based on the evolution of economic data on growth and inflation. Economists and analysts agree that from all indications the Fed will remain on hold for an extended period of time.

Thursday, October 26th New home sales jumped 5.3% in September to an annual rate of 1.075 million. This was the second month in a row that new home sales increased, however both were related to sharp downward revisions in previous months. Even with the increases, new home sales are trending lower and remain 14.2% below sales levels seen last year. Durable goods orders surged 7.8% in September compared to an expected increase of 1.4%. Demand for big ticket items was led by orders for civilian aircraft last month. Excluding the transportation component, durable goods gained 0.1%. Despite the volatility and some softness in the third quarter, manufacturing activity is poised to pick up in the fourth quarter based on the strength of new orders.

Friday, October 27th Economic growth in the third quarter fell to its slowest pace in three years weakened primarily by a sharp decline in residential investment. 3Q GDP grew at a 1.6% annual pace compared to 2.6% growth in Q2. Residential investment plunged 17.4% during the quarter which shaved 1.1 points off of total GDP growth. Net exports and inventories also detracted from growth. Positive contributors were consumer spending and business investment. The price index contained in this data series fell to 1.8% in Q3 from 3.3% in Q2.
Stock Market Close for the Week Index Latest A Week Ago Change DJIA 12090.26 12002.37 +87.89 or +0.73% NASDAQ 2350.62 2342.30 +8.32 or +0.35%


WEEK IN ADVANCE The economic calendar is jam-packed next week with indicators from all corners of the economy. So far the Fed's projections of slowing economic growth due to a cooling housing sector helping to control inflationary pressures, are playing out and data in the coming week will be weighed against that scenario. Key Interest Rates Latest 6 Mos Ago 1 Yr Ago Prime Rate 8.25% 7.75% 6.75% Fed Discount 6.25% 5.75% 4.75% Fed Funds 5.25% 4.74% 3.76% 11th District COF 4.277% 3.604% 2.870% 10-Year Note 4.67% 5.07% 4.55% 30-Year Treasury Bond 4.79% 5.15% 4.77% 30-Yr Fixed (FHLMC) 6.40% 6.58% 6.15% 15-Yr Fixed (FHLMC) 6.10% 6.21% 5.69% 1-Yr Adj (FHLMC) 5.60% 5.68% 4.91% 6-Mo Libor (FNMA) 5.3704% 5.1196% 4.2154%

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

Upward pressure on interest rates
Downward pressure on interest rates
No pressure to change interest rates
News worthy