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The economic news was mildly positive on balance this past week but fear drove the markets as drama continued with the Greek debt crisis and with wrangling over the U.S. debt ceiling. Not helping, the Fed now appears to be more concerned about bigger downside risks to economic growth.
 Following the prior week’s five-day rebound, U.S. stocks retreated on disappointment that the weekend meeting with European officials did not produce a resolution to the heightening Greek debt crisis. Fears about the possibility of Greek default are being compounded by a US deficit reduction plan that is prompting investors to shed risk. Stocks pared losses in the final hour of trading as Greece said discussions with European officials about the country’s bailout were productive.
Shares started Tuesday on an up note as traders the day before the FOMC statement were optimistic about the Fed announcing new monetary stimulus. Investors shrugged off a downgrade of Italy’s debt by the credit ratings agency Standard & Poor’s late on Monday. But most indexes turned negative following a report that European officials would to return to Athens to complete a review of the Greek economy, indicating that approval of more aid is further off than believed. The IMF also cut its global growth forecast, adding to stock declines.
At mid-week, the Fed did not disappoint on policy as the FOMC meeting statement said the Fed would be implementing an updated version of Operation Twist from the early 1960s in which the Fed lowers longer-term interest rates by selling shorter-maturity Treasuries and buying longer-maturity Treasuries. Stocks headed down sharply after the release of the statement. What caught traders attention was a downgrade by the Fed to the economic outlook with the statement noting that downside risks are “significant.” Prior to the Fed announcement, shares were being pressured by Moody’s downgrades of Well Fargo and Bank of America.
Stocks plunged Thursday from the sour mood about the Fed’s outlook which carried over from Wednesday. Also, weak economic data from China heightened fears of a global recession. Adding to the downdraft was news from FedEx that it had pared its outlook for the full year. FedEx's fortunes are often seen as a proxy for the overall economy’s health.
Stocks rebounded Friday with mild lift from bargain hunting. Also supporting gains, G-20 finance ministers made a commitment to a strong and coordinated international response to the European debt crisis. But fear dominated the week overall as the weekly loss for many indexes was the worst since October 2008 during the worst of the financial crisis.
Equities were down this past week. The Dow was down 6.4 percent; the S&P 500, down 6.5 percent; the Nasdaq, down 5.3 percent; and the Russell 2000, down 8.7 percent.
For the year-to-date, major indexes are down as follows: the Dow, down 7.0 percent; the S&P 500, down 9.6 percent; the Nasdaq, down 6.4 percent; and the Russell 2000, down 16.7 percent.
Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.
 Treasury yields fell significantly this past week—especially on the long end. Key factors were the announcement of the Fed of its Operation Twist and flight to safety over worries about Greek debt and on heavy declines in equities.
On Monday, increased expectations of a default by Greece bumped up demand for U.S. Treasuries. Longer rates nudged down Tuesday in anticipation of the Fed announcing additional ease with the key move expected to be increased purchases of longer maturity Treasuries.
 Mid-range and longer maturity Treasury yields fell significantly Wednesday as the Fed officially confirmed that it will be extending the average maturity of its holdings of Treasuries. Flight to safety was pronounced after stocks plunged when traders read the Fed’s downgrade to the economic outlook. Also, Moody’s ratings cuts for Bank of American, Wells Fargo, and Citigroup started the flight to safety ahead of the FOMC statement.
The declines continued Thursday on the gloomy and scared mood of investors from lack of progress in Europe and fears of another recession in the U.S. or even globally. The modest rebound in equities on Friday led to some reversal of flight to safety.
The Fed’s Operation Twist (although the Fed has not given its new program this name) has already taken effect as traders have already built in the announced shift by the Fed from shorter maturity Treasuries to longer maturities. In fact, rates started to dip ahead of Wednesday’s announcement. For the week, rates fell the most for the 30-year bond and 10-year note.
For this past week Treasury rates were mostly down as follows: the 5-year note, down 6 basis points; the 7-year note, down 15 basis points; the 10-year note, down 23 basis points; and the 30-year bond, down 43 basis points. The 3-month T-bill nudged up 1 basis point while the 2-year note firmed 4 basis points.
 The spot price of crude fell sharply this past week. Pushing down on West Texas Intermediate are worries that the sovereign debt crisis in Europe will lead to recession and cut demand for oil. Crude fell in four of the five sessions this past week. The trend was briefly broken Tuesday as traders were optimistic ahead of the Fed’s policy announcement on Wednesday.
But as with equities, a downgrade to the economic outlook by the Fed, noting significant downside risks, spooked energy and other commodities markets and prices fell Wednesday. But the downdraft accelerated Thursday in sympathy with stocks as crude plunged $5-1/2 bucks per barrel for the day. The slide continued Friday but at a slower pace.
Net for the week, the spot price for West Texas Intermediate plummeted $8.38 per barrel to settle at $79.58—the lowest since September 2010.
The Fed’s policy decision was the primary focus for the week. Separately, indicator news provided updates on housing and was a little more positive than expected overall for a still anemic sector.
 The big event this past week was the FOMC meeting statement at mid-week. There had been increasing speculation that the Fed would engage in additional monetary easing. These expectations were met as the Fed kept policy rates unchanged and exceptionally low but the Fed also decided to engage in a form of “Operation Twist.” The fed funds target remains at a range of zero to 0.25 percent. As many expected, the Fed announced it will be extending the average maturity of its purchases of Treasuries—a version of the so-called “Operation Twist.” The Fed also will resume purchases of agency mortgage-backed securities. The statement retained language that rates will remain exceptionally low through mid—2013.
The basic idea is that a shift of purchases of longer maturities of Treasuries and a resumption of purchases of agency debt are expected to lower longer-term credit costs. This was noted in the statement.
“To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.”
“To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Committee will maintain its existing policy of rolling over maturing Treasury securities at auction.”
Essentially, the Fed will be keeping its balance sheet at about the same level as before this meeting. Reinvesting maintains the balance sheet but does not expand it. So, the new policy cannot be called QE3 since there is no additional expansion of the balance sheet as occurred with QE1 and QE2. Nonetheless, those asserting that the Fed has “run out of bullets” forget that the near $2 trillion in balance sheet expansion remains with the accompanying surge in excess reserves. By keeping the balance sheet and excess reserves at such elevated levels, the Fed is still “shooting.”
Regarding the economy, the Fed does still see growth as positive but slow, noting weakness in labor markets and a high unemployment rate. Helping to justify the policy decision, the statement said that inflation has moderated on lower energy and other commodities prices.
Analysts and traders for the most part got exactly what they expected in the new policy action. However, the big stickler for the markets was the FOMC’s downgrade for the economic outlook. The statement noted that “there are significant downside risks” instead of merely “downside risks” as noted in the August 9 statement. This change in the statement language is what gave impetus to the plunge in equities Wednesday afternoon and continuing into Thursday.
There were three dissenting votes. Voting against the action were Richard W. Fisher (Dallas), Narayana Kocherlakota (Minneapolis), and Charles I. Plosser (Philadelphia), who did not support additional policy accommodation at this time.
The bottom line is that the Fed is essentially leaving no stone unturned to support the recovery.
 When evaluating housing data, it often is a good idea to review weather reports for the month and this likely was a good idea for August. The housing starts report for August was mixed as starts dipped while permits rose moderately. Housing starts declined 5.0 percent in August, following a 2.3 percent decrease in July. The August annualized pace of 0.571 million units is down 5.8 percent on a year-ago basis. The dip in August was led by a 13.5 percent fall in the multifamily component, following a 7.2 percent gain in July. The single-family component edged down 1.4 percent after a 5.8 percent decrease the month before.
 By region, the fall in starts was led by a 29.1 percent plunge in the Northeast with the South slipping 3.3 percent. Gains were seen in the Midwest and West—up 2.6 percent and 2.2 percent, respectively.
However, a rebound in permits suggests that some of the weakness in starts was weather related as Hurricane Irene likely weighed on new groundbreaking in the Northeast and parts of the South. In contrast to starts, housing permits rebounded 3.2 percent, following a 2.6 percent contraction in July. Permit issuance is less affected by weather since they are issued indoors. In contrast, for starts (new groundbreaking) if a construction manager thinks there is a chance of a work site being hit by torrential rains, the bulldozers are not cranked up. The August pace for permits of 0.620 million units annualized printed at 0.590 million. Permits in August are up 7.8 percent on a year-ago basis.
The bottom line is that new housing construction is still at a depressed level. The good news is that permits suggest that it is not getting worse.
 Severe weather likely damped existing home sales in August but a sizeable gain was posted nonetheless. In a rare and very welcome sign of strength in the housing sector, existing home sales surged a monthly 7.7 percent in August to an annual rate of 5.03 million. All regions show gains with strength centered in the key single-family component where sales surged 8.5 percent. In year-on-year terms, sales are up an impressive 18.6 percent but do show slightly less strength than July's year-on-year rate of 21.0 percent.
The sales surge drew supply on the market down by 3.0 percent to 3.577 million units. In terms of months at the current sales rate, supply fell sharply, to 8.5 months from 9.5 months in the prior month.
On the negative side, the median price fell 1.7 percent to $168,300 with the average price down 1.6 percent to $216,800. Year-on-year price contraction is slowly deepening, at minus 5.1 percent for the median and minus 4.0 percent for the average. However, with the National Association of Realtors price numbers the ongoing caveat is that prices are not for repeat transactions and can be affected by shifts in composition of sales between the low and high ends.
Hurricane Irene likely kept sales from being stronger. Sales in the Northeast showed the least strength of any region, a factor that suggests delayed sales in the region for this month that could boost September. Still, the NAR warns that cancellations are high and that credit remains tight.
While the stock market is looking iffy, residential real estate may be becoming a more attractive investment since an increasing share of properties is being sold at huge discounts. Investors accounted for 22 percent of purchase activity in August, up from 18 percent in July and 21 percent in August 2010. Distressed homes—foreclosures and short sales typically sold at deep discounts—accounted for 31 percent of sales in August, compared with 29 percent in July and 34 percent in August 2010.
And demand increasingly is being supported by households not tethered by an existing mortgage and home to sell. First-time buyers purchased 32 percent of homes in August, unchanged from July; they were 31 percent in August 2010.
Overall, it is good that existing home sales are up and that supply is slowly shrinking. Unfortunately, demand is not broad based which indicates that a healthy housing sector is still some time away. However, better quality house price data suggest that at least this sector is moving up from rock bottom.
 Housing prices in the moderate price range appear to be firming. The FHFA home price index in July rose for the fourth month in a row, advancing 0.8 percent after a 0.7 percent increase the prior month. The FHFA house price index covers mortgages financed by or bundled by federal housing agencies.
On a year-on-year basis, the FHFA HPI is down 3.3 percent, compared to down 4.5 percent in June.
 Eight of the nine Census Divisions gained in July, showing widespread improvement. For the nine Census Divisions, seasonally adjusted monthly price changes for month-ago July ranged from minus 0.4 percent in the South Atlantic Division to plus 3.6 percent in the West North Central Division.
With improvement in recent months, this index is now a cumulative 2.2 percent above the recent low hit in March of this year when it was 20.1 percent lower than the peak seen in April 2007. The FHFA HPI is still 18.4 percent below peak, indicating that prices are still very soft.
 A moderately strong August gain in the index of leading indicators looks good at face value but it is due to unusual movement in one component.
The index of leading indicators rose 0.3 percent in August, following a 0.6 percent boost the month before. The biggest contributor to the latest rise was money supply with a 0.70 percentage point contribution—meaning the index would have fallen 0.4 percent without this component. Why the surge in money supply' With the plunge in the stock market and increased fear in financial markets overall, investors and traders moved money out of mutual funds and other investment accounts into cash—flight to safety. The jump in M2 reflected fear instead of the usual causation—banks making more loans.
The second most positive component in August was the yield spread which has been a leading plus for this report throughout the recovery reflecting the Fed's near zero short rate policy. Building permits were a solid plus with slowing in vendor deliveries a marginal plus.
The drop in stock prices was August's biggest negative followed by consumer expectations and the factory workweek. Economic growth in the current economy is very sluggish as noted by a very thin 0.1 percent gain for the coincident index, matching July’s soft pace.
Based on economic news, the economy is still muddling along at a sluggish but positive pace. The Fed’s latest move for monetary policy will add a little extra support for the housing sector with slightly lower mortgage rates. However, the economy really needs a boost in demand and employment and any significant changes in the short term will have to come from fiscal policy which is hopefully to be addressed in coming days.
The biggest market movers are durables orders (Wednesday) and personal income and spending (Friday). Regional numbers from the Dallas Fed (Monday) and Kansas City (Friday) will focus on manufacturing. Housing updates include Case-Shiller (Tuesday) and pending home sales (Thursday). The consumer pulse is checked with consumer confidence (Tuesday) and consumer sentiment (Friday). The third estimate for second quarter GDP is released Thursday.
The Dallas Fed general business activity index contracted in August, dropping to minus 11.4 from minus 2.0 in July. The production index, a key measure of state manufacturing conditions, remained positive but fell from 10.8 to 1.1. Most other measures of current manufacturing conditions indicated slower growth in August. The new orders index fell from 16.0 to 4.8, suggesting order volumes continued to increase, but at a decelerated pace.
The S&P/Case-Shiller 20-city home price index (SA) in June edged 0.1 percent lower for a second straight month with 11 of the 20 cities showing declines. Seasonality is at play during spring and summer which is a strong time for home sales and, in what is a mild positive, unadjusted data showed 1.1 percent gains for both the composite 10 and composite 20 indexes during June following 1.0 percent gains for both in May.
The S&P/Case-Shiller 20-city HPI (SA), m/m, Consensus Forecast for July 11: +0.1 percent
Range: -0.5 to +0.5 percent
The S&P/Case-Shiller 20-city HPI (NSA), y/y, Consensus Forecast for July 11: -4.5 percent
Range: -5.0 to +-4.1 percent
The Conference Board's consumer confidence index in August fell a very steep 14.7 points to 44.5 for the lowest reading since April 2009. Weakness was concentrated heavily in the expectations index, down a huge 23.0 points to 51.9, which is also at its lowest level since April 2009. The present situation component, at 33.3 for a 2.4 point loss, showed less deterioration though the assessment of the current jobs market did weaken noticeably.
Consumer confidence Consensus Forecast for September 11: 46.5
Range: 42.0 to 48.0
The Richmond Fed manufacturing index in August fell to minus 10 from minus 1 in July. Order readings were very weak with new orders falling six points to minus 11 for the third negative reading in four months. Backlog orders fell seven points to minus 25 for the fourth straight monthly contraction.
Durable goods orders in July surged a revised 4.1 percent with the motor vehicle component up 9.8 percent in what appears to be the hoped for snapback from an earlier shortage of Japanese parts. Nondefense aircraft orders, which nearly always show wide month-to-month swings, rose 43.4 percent and together with motor vehicles made for a 14.8 percent jump in the transportation category. Excluding transportation, new orders rose a solid revised 0.8 percent in July.
New orders for durable goods Consensus Forecast for August 11: +0.2 percent
Range: -1.5 percent to +2.7 percent
New orders for durable goods, ex-trans., Consensus Forecast for August 11: -0.2 percent
Range: -1.9 percent to +1.0 percent
GDP growth in the Commerce Department’s second estimate for second quarter GDP was nudged down to a modest gain of 1.0 percent annualized, compared to the initial estimate of 1.3 percent and to first quarter growth of 0.4 percent. The downward revision to GDP primarily reflected downward revisions to private inventory investment and to exports. Final sales of domestic product were revised to an annualized 1.2 percent from the initial estimate of 1.1 percent. Final sales to domestic purchasers were revised up to 1.1 percent from the original estimate of 0.5 percent annualized. Economy-wide inflation was revised up marginally to 2.4 percent annualized, compared to the original estimate of 2.3 percent.
Real GDP Consensus Forecast for third estimate Q2 11: +1.2 percent annual rate
Range: +0.9 to +1.4 percent annual rate
GDP price index Consensus Forecast for third estimate Q2 11: +2.4 percent annual rate
Range: +2.4 to +2.5 percent annual rate
Initial jobless claims in the September 17 week dipped 9,000 to 423,000. However, the four-week average rose to 421,000 from a revised 420,500 in the prior week.
Jobless Claims Consensus Forecast for 9/24/11: 420,000
Range: 410,000 to 425,000
The NAR pending home sales index declined 1.3 percent in July after a 2.4 percent jump the prior month. Signings were nonetheless above year-ago levels, up 14.4 percent in July. All regions showed monthly declines except for the West.
Pending home sales Consensus Forecast for August 11: -2.0 percent
Range: -3.0 to +1.0 percent
The Kansas City Fed manufacturing index posted at 3 in August, unchanged from 3 in July and down from 14 in June. The production index fell from 2 to minus 2, and the shipments index also moved into negative territory. However, the new orders index rebounded to plus 1 from minus 5 in July.
Personal income in July rose a moderately healthy 0.3 percent after rising 0.2 percent in June. Wages & salaries grew a little more robust 0.4 percent, following a bump up of 0.1 percent the month before. Consumer spending rebounded a sharp 0.8 percent after slipping 0.1 percent in June. On the inflation front, the headline PCE price index jumped 0.4 percent, following a 0.1 percent decrease in June. The primary reason was energy costs with food also contributing. The core rate posted a 0.2 percent gain, matching the June pace and equaling expectations. Looking ahead to August numbers, the private wages & salaries component in personal income is likely to be negative as private aggregate earnings fell 0.4 percent. Spending should be sluggish as unit new motor vehicle sales slipped 0.8 percent and retail sales excluding auto edged up only 0.1 percent. PCE price inflation will likely be on the warm side, tracking the August CPI where the headline was up 0.4 percent and core up 0.2 percent.
Personal income Consensus Forecast for August 11: +0.1 percent
Range: -0.1 to +0.3 percent
Personal consumption expenditures Consensus Forecast for August 11: +0.2 percent
Range: +0.1 to +0.4 percent
Headline PCE price index Consensus Forecast for August 11: +0.3 percent
Range: +0.2 to +0.3 percent
Core PCE price index Consensus Forecast for August 11: +0.2 percent
Range: +0.2 to +0.2 percent
The Chicago PMI in August slipped 2.3 points to 56.5, but remained comfortably over 50 to indicate solid growth in the area's economy though at a slightly slower rate than July. The new orders index posted at 56.9, compared to 59.4 in July.
Chicago PMI Consensus Forecast for September 11: 55.4
Range: 52.0 to 58.0
The Reuter's/University of Michigan's consumer sentiment index rose to 57.8 for the mid-September reading from 55.7 for the final for August. Improvement came from the current conditions component which gained to 74.5 from 68.7 at the end of August. Unfortunately, the consumer expectations component, in a reflection of the weak jobs market and recent trouble in the financial markets, is at the lowest point since the Iranian hostage and oil crisis more than 30 years ago.
Consumer sentiment Consensus Forecast for final September 11: 57.8
Range: 56.0 to 59.0
R. Mark Rogers is the author of The Complete Idiot’s Guide to Economic Indicators, Penguin Books, 2009.
Econoday Senior Writer Mark Pender contributed to this article.
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