Ip mortage

Interest rates fell this week on the July employment report. For the last

few weeks the bond market has held a positive technical outlook. While most

of the estimates for July job growth were touted at 240K to 300K new jobs,

traders were not biting on the forecasts. On Friday morning once again it

was proven that price action is a more reliable way to view the market than

listening and believing the Wall Street economists and analysts.

July non-farm payrolls were not only disappointing, but drives serious

re-thinking about where the economy really is, and what we can expect for

the rest of the year. There is little doubt analysts, economists and the Fed

have grossly over-estimated the present economic climate and have

under-estimated the impact of continued higher energy prices on the economy

and particularly consumer spending. New jobs in July were just 32K; adding

salt to the economic wound, June NFP jobs were revised from the soft 112K

jobs originally reported to just 78K, and May NFP job growth declined from

250K originally reported to 205K---a total of 79K jobs subtracted. For the

last three months just 315k jobs have been created, well below what

economists expected to be 700K jobs.

Greenspan testified to the Senate two weeks ago and said he looked for the

economy to recover from the June slump and that the 2nd half of the year

would likely grow at a 5.0% annual rate. Given the recent data and the

increasing terrorist fears of an attack in the US before the elections or at

the Olympics, the outlook for that kind of growth isn't justified. Do not

under-estimate the underlying terrorist fears gripping investors and

consumers; not to mention the impact on prospective employers. Recent data

from the Institute for Supply Management (ISM) revealed better outlooks from

the manufacturing and service sectors, but with no new hiring evident. No

matter how it is spun, without jobs there is little reason to expect the

economy to improve.

Then there is the reality that crude oil prices are not likely to decline in

any appreciable way with terrorist fears at extremes now and through the

rest of the year. Traders in the oil market indicate there is at least

$10.00/barrel priced in as speculative due to terrorist fears of disruption.

Demand for oil as a result of the economic explosion in Asian countries has

also been grossly under-estimated by analysts. As cooler weather approaches

in the next few weeks, look for natural gas prices to start climbing again;

supplies remain at very low levels.

The Fed will likely follow through with a 25 basis point increase in the Fed

funds rate on Tuesday, but we expect the Fed to back off in the statement

released at the conclusion of the FOMC meeting, sending the message they

will hold pat---most likely through the rest of the year. Another 25 basis

points in the prime rate to 4.50% is an additional blow to consumers with

those large home equity loans tied to the prime rate.

Bottom line: the economy is slowing, interest rates will stay low, terrorist

concerns will continue to keep fear levels high, and energy prices will not

fall much from these levels further hand-cuffing consumer spending. There is

more likelihood of increasing energy prices than declining prices.