Vital Signs for the Week of Sept. 20


It's a forgone conclusion that the Federal Reserve will raise interest rates when officials meet to discuss monetary policy on Sept. 21. The nearly unanimous forecast from economists surveyed by Action Economics is for a 25 basis-point hike to 1.75%.

However, figuring out how aggressive the Fed will be the rest of the year is not as easy. The consensus among those surveyed by Action Economics is for one more quarter-point rate hike after September.

Based on the latest inflation data, it would appear that the central bank can take its time. In August, the consumer price index increased just 0.1% from the previous month, and slowed to 2.7% growth from a year ago, compared with 3% in July. Excluding food and energy, inflation is running at 1.7%.

In addition, producers are not passing along the large price increases in commodities and other raw materials. Compared with the same period a year ago, August producer prices were up 3.4%, after peaking at 5% in May.

Chairman Alan Greenspan appears to have been right when he stated that inflationary pressures earlier this year were "transitory." However, recent talk by Fed officials shows the focus isn't squarely on the current level of inflation. The latest speeches show that the Fed may try to take advantage of the current easing in inflationary pressures. It can stick to the gradual quarter-point strategy and still ensure it stays ahead of the inflation curve.

After all, the current fed funds rate of 1.5% is equal to the Fed's preferred measure of inflation, the price index for personal consumption excluding food and energy. This means the real rate of interest is zero percent, a very accommodating level. If the Fed is right and the economy is once again picking up steam, then interest rates should be higher. Indeed, recent speeches by monetary policy makers indicate a more desired level lies somewhere between 3% and 5%.

Just how fast the central bank gets to its desired level is the key question. Economists and investors will pay close attention to the post-meeting memo for any clues, especially how the central bank judges the balance between inflation and growth. So far, the latest chatter from Fed officials indicates no pause in rate hike actions this year.

Here's the weekly economic calendar:

MEETING OF NOTE

Monday, Sept. 20, 8 a.m. EDT

International Monetary Fund Managing Director Rodrigo de Rato delivers a speech to the Council on Foreign Relations in New York City.

6 p.m. EDT

Pakistan President Pervez Musharraf attends a dinner in his honor hosted by the U.S. Chamber of Commerce in New York City.

EARNINGS REPORTS

Adobe Systems, Nike, PalmOne, and more

HOME BUILDERS SURVEY

Monday, Sept. 20, 1 p.m. EDT

The National Association of Home Builders will release monthly survey results for September. The report updates housing market conditions by measuring builders' assessments of current sales, buyer traffic through model homes, and expected demand.

In August, the index rebounded strongly, to 71, after easing to 67 in July, from 68 in June, and 69 in May. The index tracking the prospective buyer traffic registered its highest level since May of 1999, hitting 57, from 50 in July. The index of single-family home sales and the index tracking homebuilders' expectations for sales over the next six months both improved as well.

The NAHB cited declining mortgage rates for the revival, stating that potential homebuyers who were sitting on the sideline as mortgage rates rose earlier this year entered the market.

MEETING OF NOTE

Tuesday, Sept. 21

The Federal Reserve's Federal Open Market Committee meets to discuss monetary policy. An announcement by the Fed will come around 2:15 p.m.

Economists expect the FOMC to raise the federal funds rate once again. Those surveyed by Action Economics unanimously forecast a 25 basis-point increase, to 1.75%.

Fed watchers will be interested in the post-meeting press release to glean some information about how the Fed perceives the economy. In the previous post-meeting press release, the FOMC said "the economy nevertheless appears poised to resume a stronger pace of expansion going forward. Inflation has been somewhat elevated this year, though a portion of the rise in prices seems to reflect transitory factors."

12:30 p.m.

Acting Commodity Futures Trading Commission Chairman Sharon Brown-Hruska speaks at the Down Town Association in New York City.

EARNINGS REPORTS

AutoZone, General Mills, Goldman Sachs, Lehman Brothers, and more

ICSC-UBS STORE SALES

Tuesday, Sept. 21, 7:45 a.m. EDT

This weekly tracking of retail sales, assembled by the International Council of Shopping Centers and UBS bank, will update buying activity for the week ending Sept. 18. In the week ended Sept. 11, seasonally adjusted sales were up 0.2%, after holding steady in the previous period, and slipping 0.2% in the week ended Aug. 28.

NEW RESIDENTIAL CONSTRUCTION

Tuesday, Sept. 21, 8:30 a.m. EDT

The housing market continues to roll along. Housing starts probably moved back to an annual pace of 1.95 million in August. That's the consensus estimate of economists surveyed by Action Economics. The number of July housing starts rebounded, to an annual pace of 1.98 million, after falling to 1.83 million in June, from a pace of 1.98 million in May. Housing starts are currently on pace to post the biggest yearly total since 1978.

INSTINET REDBOOK RESEARCH STORE SALES

Tuesday, Sept. 21 8:55 a.m. EDT

This weekly measure of retail activity will report sales for the third fiscal week of September, ending the 18th. During the first two weeks, sales were up 1% compared with the same period in August. For the full month of August, sales were off 1.1%, after July sales dropped 0.1% from June.

EARNINGS REPORTS

Wednesday, Sept. 22

Bear Stearns, Bed Bath & Beyond, ConAgra Foods, Darden Restaurants, FedEx, Worthington Industries, and more.

MORTGAGE APPLICATIONS

Wednesday, Sept. 22, 7 a.m. EDT

The Mortgage Bankers Association releases its tally of mortgage applications for both home buying and refinancing for the week ending Sept. 17. In the week ended Sept. 10, the purchase index eased to 455.7, from 476 in the previous week, but remained above the 443.1 level for the week ended Aug. 27. The latest reading of the four-week moving average also edged lower, coming in at 454.6, from 457.5 in the week ended Sept. 3.

The average rate on a conventional 30-year mortgage, according to HSH Associates, rose to 5.93% in the week of Sept. 17.

The housing market remains in good shape. Subdued inflation and questions about the strength of the economic recovery have helped keep a lid on mortgage rates. The current volume of mortgage applications still remains far above the five-year average.

The refi index improved during the latest period, reaching 1972.5, from 1948.9 in the week ended Sept. 3, and 1804.1 in the week ended Aug. 27. The refi index four-week moving average slipped to 1887.6, from 1890.2 in the prior period.

EARNINGS REPORTS

Thursday, Sept. 23

A.G. Edwards, Rite Aid, and more.

JOBLESS CLAIMS

Thursday, Sept. 23, 8:30 a.m. EDT

First-time claims for jobless benefits for the week ended Sept. 18 are expected to inch up to 335,000, according to the consensus estimate of economists surveyed by Action Economics. Jobless claims climbed to 333,000 in the week ended Sept. 11, from 317,000 in the week ended Sept. 4.

The four-week moving average held at 338,000 for a second straight week. In the week of Sept. 4, continuing jobless claims stayed at 2.9 million.

LEADING INDICATORS

Thursday, Sept. 23, 10 a.m. EDT

The Conference Board's composite report of leading economic indicators for August probably fell for a second straight month. Based on the median forecast of economists queried by Action Economics, the August index declined 0.2%, after a 0.3% drop in July and a 0.1% dip during June. Based on the August forecast, the index would be up about 2.4% from a year ago, down from the 2.8% pace in July, and 3.8% in June.

DURABLE GOODS ORDERS

Friday, Sept. 24, 8:30 a.m. EDT

New orders received by manufacturers of durable goods probably slipped 0.2% in August, according to the consensus forecast from Action Economics. In July, orders increased 1.6%, after a 1.3% gain in June. The recent increases have been bolstered by orders for aircraft, both commercial and defense.

An important part of the August report will be orders for computers and electronic parts. In three of the past four months, new orders in this category have fallen. It is one of the largest categories and is an important indicator of business investment. A rebound in computer orders would be a positive indicator that a broad upswing in businesses investment remains intact.

Other indicators for orders are mixed. The national factory activity survey by the Institute for Supply Management showed some easing in orders growth. The September regional factory activity surveys by the New York and Philadelphia Federal Reserve Bank showed increases in new orders.

EXISTING HOME SALES

Friday, Sept. 24, 10 a.m. EDT

August existing home sales will cool down a little more, according to the consensus estimate of economists surveyed by Action Economics. The median forecast calls for sales to reach an annual rate of 6.64 million. In July, sales fell to a pace of 6.72 million, after hitting a record annual pace of 6.92 million in June, from 6.81 million in May. Existing home sales are on track to break the previous record of 6.1 million sales set last year. By James Mehring


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