News Details (Posted: October 26, 2006):

Money Market Recap & Forecast

Full Description:

Week of Oct. 23, 2006
The normally feared inflation indicators left U.S. Treasuries unmoved last week. But news from the housing industry and labor statistics did spark some selling. All week there was a little push-pull between buying and selling, leaving Treasury yields, which move in the opposite direction of prices, where they started. Mortgage rates, which move with yields, remained status quo.

The week began with the October NY Empire State manufacturing index jumping to 22.9 from 13.8. However, the “prices paid” index, an inflation indicator, fell to its lowest point in more than a year. This left traders wondering what a series of speeches by Fed official would reveal. As it turned out, they revealed nothing.

The producer price index for September, which looks for inflation at the wholesale level, showed a 1.3% decrease due largely to falling prices of energy. But the core rate, which excludes volatile food and energy prices, rose by a hefty 0.6%. Although initially shocking, the increase was due mostly to increased auto prices, which rose as rebates and other incentives disappeared. What rallied Treasuries were August inflows that showed strong demand for Treasuries from foreign buyers -- the best since November 2005.

Industrial production slipped in September, falling 0.6%, the biggest decline in a year. This was welcomed as a sign of an economic slowdown.

The consumer price index was also tame. Falling energy prices pushed the CPI down 0.5%, while core inflation rose by an expected and acceptable 0.2%. Although core inflation is running high, it is believed that it’s on its way down -- not up. Housing starts in September were another matter, however. They rose 6.63% to an annual rate of 1.77 million units, beating forecasts of 1.65 million. This rattled traders’ perceptions about economic weakness.

On Thursday mixed signs appeared again, with first-time unemployment claims dropping to 299,000 from 309,000 for the week ended Oct. 14. This signals a tight labor market that could lead to wage inflation. Treasuries sold. But then the October Philly Fed index of business conditions slid deeper into negative territory, warning of contraction in the sectors. “Prices paid” also fell.

Applications to refinance were down for the week ended Oct. 13, as mortgage rates began to edge back up. According to the Mortgage Bankers Association, refis fell 5.3%, but applications to purchase remained positive, rising 0.4%.

This week features sales figures for new and existing homes for October. Analysts are predicting declines in both categories, but in light of the housing starts figure, who knows?

Although existing-home sales are due out Wednesday morning -- the first economic release of the week -- the more important news will be released at 2:15 p.m. ET, when the Federal Open Market Committee announces its decision on interest rates. Although no change is expected, there is much anxiety regarding decisions at future meetings. Indications that a rate hike or a decrease is in the offing would certainly influence Treasuries.

New home sales are due Thursday, along with durable goods orders for September. Durables, those items meant to last three or more years, provide some insight into factory production and business spending. Also on tap, first-time unemployment claims for the week ended Oct. 21. Recent big moves have attracted market attention.

On Friday we get the first look at 3rd quarter gross domestic product -- the nation’s broadest measure of economic activity. It is expected to slow from 2nd quarter figures, which would be well received by traders. Personal consumption expenditures (PCE) are also contained within the report and could move the markets if signs of inflation are found -- or not found. Also due, the University of Michigan’s final October consumer sentiment survey. It took a big leap two weeks ago that spurred selling in Treasuries. This time, however, it’s expected to remain unchanged.