Keeping you updated Week of Feb 25, 2008

Keeping you updatedon the market! For the week of February 25, 2008
MARKET RECAP
The interest-rate party was fun while it lasted, but it appears to be over – at least for awhile. Depending who you ask and when you asked him, the 30-year fixed-rate prime conforming mortgage spiked as much as 41 basis points (according to Bankrate), or as little as 32 basis points (according to Freddie Mac). Either way, the 30-year benchmark is well above levels this time last week, and even this time last year, exceeding 6.4% in some markets.
The punchbowl was swiftly removed because of a rising threat of inflation. The Labor Department reported that consumer prices jumped 0.4% in January and are up 4.3% in the past 12 months, nearing a 16-year high. Even stripping out sharply rising food and energy costs, prices rose 0.3%.
The same day inflation reared its ugly head, the Federal Reserve disclosed that it reduced its forecast for economic growth this year to between 1.3% to 2%, half a percentage point below the level of its previous forecast offered in October. Fed officials blamed the decelerating outlook on slumping housing prices, tighter lending standards and higher oil prices.
Somewhat remarkably, housing eschewed its familiar role as red-headed economic stepchild. For the second straight month, homebuilder confidence rose, according to the National Association of Home Builders and Wells Fargo index of builder sentiment. The index increased to 20 in February, up from 19 in January. Disaggregating the index, sentiment increased to 24 in the Northeast, 15 in the West, 24 in the South and remained at 16 in the Midwest.
Perhaps the increased confidence resulted from an unexpected increase in new home sales, which inched ahead 0.8% to an annual rate of 1.01 million homes in January, and the fact that traffic in model homes picked up in January, according to the NAHB.
Economic Indicator Analysis

Existing Home Sales(January)
Mon. Feb. 25,10:00 am, et
4.82 Million (Annual Rate)
Important. The downtrend continues, but is showing signs of easing.

Producer Price Index(January)
Tues. Feb. 26,8:30 am, et
All Goods: 0.4% (Increase)Core: 0.3% (Increase)
Very Important. More evidence of inflation could send interest rates higher.

Consumer Confidence(February)
Tues. Feb. 26,10:00 am, et
85 Index
Moderately Important. Higher energy prices are tempering consumer optimism.

Mortgage Applications
Wed. Feb. 27,7:00 am, et
None
Important. Applications are falling on rising rates and a slowing economy.

Durable Goods Orders(January)
Wed. Feb. 27,8:30 am, et
1.5% (Decrease)
Important. Consumers are showing signs of cutting back on big-ticket purchases.

New Home Sales (January)
Wed. Feb. 27,10:00 am, et
604,000 (Annual Rate)
Important. Sales are expected to hold above December's multi-year low.

Gross Domestic Product(4th Quarter 2007)
Thurs. Feb. 28,8:30 am, et
0.6% (Annual Rate)
Very Important. A lower-than-expected GDP growth rate could send markets into a tailspin.

Personal Income & Expenditures(January)
Fri. Feb. 29,8:30 am, et
Income: 0.2% (Increase)Expenditures: 0.1% (Increase)
Important. Consumers are tightening their purse strings in response to heightened economic concerns.

THAT '70S SHOW
The 1970s was known for more than just bad haircuts, polyester suits and unreliable automobiles; it was also deemed a prolonged period of economic morass. Those of us with long memories remember “stagflation” – a word coined by the Brits to define the years from 1970 to 1981, a period marked by 15% annual inflation rates, three recessions and unemployment approaching 10%.
The word “stagflation” is reappearing in contemporary vernacular. Some pundits are lamenting that 2008 is beginning to resemble 1978. There are similarities, to be sure: namely rising oil and commodity prices and easing productivity growth rates. But that's as far as the resemblance goes. Today's circumstances are far different: the inflation rate is much lower, unemployment is only 4.9% and the Fed is much more aggressive at cutting inflation off at the knees.
How much more aggressive the Fed will need to get will depend on this week's producer price index. Credit markets were caught off guard by last week's rise in consumer prices. If producer prices negatively surprise as well, we could see the Fed do a 180 on interest rate cuts, which would make a 6.4% 30-year fixed-rate mortgage seem like a bargain, at least into the relevant future.