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Employment Down

Inflation Steady

Existing Sales Up

Manufacturing Weak

Events Next Week:

Tues 1/8
Pending Sales

Thurs 1/10
Jobless Claims

Fri 1/11
Trade Balance
Import Prices

The first major economic report of the year, Friday's Employment report, shocked investors by falling well short of the expected levels. Against a consensus forecast of 70K new jobs in December, the economy added only 18K jobs, the lowest level of growth since August 2003. The Unemployment Rate jumped to 5.0%, above the expected level of 4.8%. As has been the case in recent months, the construction and manufacturing sectors showed the greatest weakness. The one sign of strength came from the Average Hourly Earnings component, which beat expectations with an increase at a 3.7% annual rate.

The economic news earlier in the week was generally below expectations as well. On Wednesday, the ISM national manufacturing index came in at 47.7, below the consensus of 50.5. Readings below 50 indicate a contraction in the manufacturing sector. As a result of last week's economic data, mortgage investors pushed mortgage rates down, matching the lowest levels of 2007. Investors also dramatically boosted their expectations for future Fed rate cuts. At the start of the week, investors were pricing in about a 75% chance of a quarter point rate cut at the next meeting on January 30. Now, they price in a 100% chance of a quarter point cut and a 50% chance of a larger half point cut.

In contrast to most of the other economic data last week, the news out of the housing sector was slightly positive relative to expectations. November Existing Home Sales matched the consensus forecast, rising slightly to a 5.0M unit annual pace. Inventories of unsold homes declined a little to a 10.3 month supply. After the weak results for New Home Sales the prior week, last week's data was a little encouraging.

Week Ahead

Next week will be a very light one on the Economic Calendar. Pending Home Sales, a leading indicator of future housing market activity, will be released on Tuesday. Import Prices and the Trade Balance, two reports which have not been market movers in recent months, will come out on Friday. Fed speakers will add to the small supply of economic news next week.