Another Fed Rate Drop Forcasted!

For the week of October 1, 2007 - Vol. 5, Issue 40

>> Review of Last Week

"BEARS DON'T LIVE ON PARK AVENUE."  Bernard Baruch
The Wall Street legend would have applauded the net bullish ending to this most volatile third quarter. It featured the market swings of August, the surprising major rate cut by the Fed in September, super strong commodity prices, but a still tight credit situation and slow housing markets in many parts of the country. Nonetheless, during this quarter, which is traditionally their worst, the markets did very nicely, thank you. For the three months ended last week, the Dow was up 3.63% to 13,895.63, while the S&P 500 was up 1.56% to 1,526.75, and the NASDAQ finished up 3.77% to 2,701.50.

Economic highlights of the week began with a lower than expected September Consumer Confidence reading of 99.8. This was followed by an August Existing Home Sales report of 5.50M, no worse than expected, but down by .25M from the previous reading. Wednesday saw August Durable Goods down 4.9%, well below the estimate and a big reversal from the 6.1% growth last reported. Thursday, Gross Domestic Product (GDP) for Q2 came in at a 3.8% growth rate (sure sounds like a healthy economy to me) and Initial Jobless Claims were at 298,000, their lowest level since May. Then New Home Sales came in weaker than expected at 795,000. But hold on, Friday saw the Fed's favorite inflation reading, the Core PCE, at 1.8% year over year. Yippee, went the markets...that's well within the Fed's 1-2% annual inflation range, so the week's not-so-good economic numbers should push the central bankers to another rate cut at the end of the month!

The week ended with another ironic twist as Personal Spending for August came in at a higher than anticipated 0.6%, indicating consumers were happy to keep their two-thirds of the economy moving in the right direction...toward Park Avenue, I believe.

>> This Week's Forecast

A COUPLE OF BIG BOOKENDS
Be sure to check out the September ISM Index on Monday, a key look into national manufacturing activity in the wake of the credit market turmoil. Then watch for the Friday September employment report, a potential market mover with possible impact on bonds and near-term home loan rates. As investors cautiously step into the final quarter, they'll also be looking at reports from corporate notables during the week...Walgreen, Palm, Pepsi, Marriot, and Research in Motion, better known as the Blackberry company.

>> The Week's Economic Indicator Calendar

Remember, in general, weaker than expected economic data is good for interest rates, while positive data causes rates to rise.

Economic Calendar for the Week of Oct 1 - Oct 5

>> Home Base

INFO THAT HITS US WHERE WE LIVE
The August New Home Sales figure of 795,000 missed analysts' expectations by 35,000. Worse, the national median sales price in August fell to $225,700, down 7.5% from a year ago. This was the biggest annual percentage drop in almost 37 years. (Median price is the exact midpoint at which half of all houses sell for more and half sell for less.) In addition, August's average sales price fell 8% from a year earlier to $292,000, the biggest decline for that number in 17 years. But real estate is a local phenomenon, as we all know. While sales fell for the month in the South and the West, in the Northeast they rose 43.2% over July. And in the 12-state Midwest region, roughly 135,000 new homes sold, a 20.5% increase over July!

>> Federal Reserve Watch

Forecasting Federal Reserve policy changes in coming months. With this week's spotty news on the overall economy, but encouraging report on inflation, many experts now expect a 0.25% rate cut from the Fed at the end of this month.

Current Fed Fund Rate: 4.75%

Odds of change from current policy: