Week In Review

[Adam in CO]

Economic Highlights for the Week Ending August 11, 2006

Monday, August 7th Consumer credit increased by $10.3 billion or at a 5.7% annual rate in June. This is the third straight month of oversized gains in credit outstanding. Credit gains were led by the revolving credit category which consists mostly of credit card debt. Non-revolving credit balances, like car loans, also increased strongly during the month.

Tuesday, August 8th Productivity grew at a 1.1% annual rate in the second quarter, in line with expectations, but slower than a 3.7% rate in Q1. Unit labor costs increased 4.2% last quarter after upward revisions to costs in the previous three quarters. These data show that productivity growth has slowed while labor costs are running at their fastest pace in over 5 years. The Federal Open Market Committee opted to hold key short term rates steady at their policy setting session today as widely expected by economists and financial markets. The fed funds rate stands at 5.25%, its highest level since March 2001. The pause in tightening today follows 17 consecutive 25 bp rate hikes. In the policy statement the Fed indicated that economic growth has moderated because of a cooling housing market and higher energy costs and interest rates.

Wednesday, August 9th The MBA mortgage applications index rose 4.9% to 553.3% for the week that ended August 4. The purchase index gained 3.4% on the week while refinancings increased 7.1%. Homebuilder Toll Bros reported weaker than expected quarterly results today and lowered estimates for the number of homes it will deliver in the current quarter. Chairman Robert Toll said in a statement that the current housing slowdown "is the first downturn in the forty years since we entered the business that was not precipitated by high interest rates, a weak economy, job losses or other macroeconomic factors." Toll believes it "to be the result of an oversupply of inventory and a decline in confidence." While the Chairman expects the market to return to previous high levels once supply is absorbed and buyers become confident that home prices have stabilized, he expects the slowdown to last at least through this year and possibly for another year or two.

Thursday, August 10th The international trade deficit on goods and services narrowed to $64.8 billion June from a gap of $65.0 billion in May. The smaller trade gap was due to a solid decline in oil imports and considerable export gains. The June trade picture was better than expected and will result is a small upward revision to Q2 GDP. Jobless claims increased 7k to 319k for the week that ended August 5. The level of claims is above their year-to-date average indicating still solid but somewhat softer labor market conditions. Lenders eased mortgage rates this week in response to the Fed's pause in tightening. 30-year fixed rate mortgages averaged 6.55% this week compared to 6.63% last week according to Freddie Mac's mortgage market survey. Lower mortgage rates should help sustain healthy housing market activity. Freddie Mac economists predict that 2006 will be the third highest level for total home sales on record.

Friday, August 11th Retail sales jumped 1.4% in July after a downwardly revised drop of 0.4% in June. Retail sales were stronger than expected last month and driven primarily by a 3.1% gain in motor vehicle sales. Gasoline sales were strong too, up 2.5% on the month due to higher prices. The strong rebound in spending last month gets Q3 off to a fast start but may come under some restraints as consumers try to manage rising debt, higher energy prices, weaker home price appreciation and slower job growth. Import prices jumped 0.9% in July led by a 4.7% increase in petroleum prices. Excluding petroleum, import prices actually fell 0.1% last month. Higher imported energy costs will likely boost headline producer and consumer prices for the month of July as well. Lower overall import prices suggest more contained core rate gains.

Stock Market Close for the Week
Index Latest A Week Ago Change
DJIA 11088.03 11240.35 -152.32 or -1.35%
NASDAQ 2057.71 2085.05 -27.34 or -1.31%


WEEK IN ADVANCE The interest rate outlook will continue to be shaped by incoming economic reports especially inflation data. Next week two key inflation readings, the consumer and producer price indexes, will have the most market moving potential as investors and economists weigh the latest data against the Fed's most recent policy decision.

Key Interest Rates Latest 6 Mos Ago 1 Yr Ago
Prime Rate 8.25 7.50 6.32
Fed Discount 6.25 5.50 4.32
Fed Funds 5.25 4.50 3.48
11th District COF 4.090 3.296 2.676 10-Year Note 4.96 4.56 4.36
30-Year Treasury Bond 5.09 4.53 4.45
30-Yr Fixed (FHLMC) 6.55 6.24 5.89
15-Yr Fixed (FHLMC) 6.28 5.83 5.47
1-Yr Adj (FHLMC) 5.69 5.34 4.57
6-Mo Libor (FNMA) 5.5473 4.8126 3.9235

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