AJ&8217;s ECONOMIC BUZZ:

Last Week&8217;s Economic Retrospective:

Last Friday, the markets learned not to judge all economic reports by their headlines. The Retail Sales Report at first glance appeared to be much weaker than expected, with the headline numbers appearing as if consumers were pulling back on their spending. But when gasoline and auto sales were removed, the Report actually showed that spending in the nation's shopping malls continues to increase. The buying habits of the US consumer appear to be quite brisk.

The last Fed meeting gave us the indication that inflation was under control. The official word following the meeting was that the Fed again elected to pause in the rate hike cycle. But the Fed&8217;s &8220;Meeting Minutes&8221; from the last Federal Open Market Committee policy-setting meeting spun a slightly different story. The details of the dialogue amongst the attending members, including those who did not vote in the last meeting, hinted of continued concerns about inflationary pressure in our economy. Remember, inflation erodes the value of a fixed-return Bonds and therefore home loan rates which are based on Bonds. On this news, home loan rates worsen slightly, about .125% higher over the course of the week.

This Week&8217;s Economic Forecast:

Last week's Fed Meeting Minutes basically said that the Feds are not ready to stop interest rate hikes. Why? Well, in addition to Richmond&8217;s Federal Reserve President Jeffrey Lacker, there were several other Fed members who believe that more hikes should be in order, but it wasn't their turn to actually vote. What I think the Fed actually said is that inflation is not under control and more rate hikes are likely. In any case, the market is a little uneasy. Traders who were once confident after the rate hike pause are now uneasy as what direction the Fed will take with rate hikes.

Additionally, the Minutes also revealed that the Fed sees continued US economic strength going into 2007 and they are uncertain whether the recent drop in energy prices can be counted on to remain in place much longer. Remember, good news for the economy is good news for Stocks but because Stocks and Bonds are often competing for the same investment dollar, good economic news can be bad news for Bonds and therefore home loan rates too.

You can bet that with all this renewed talk on inflation, the Fed will be closely watching this coming week's Producer Price Index (PPI) and Consumer Price Index (CPI), which measure inflation on both the wholesale and consumer levels. If the news bears out continued economic strength and whiffs of inflation, home loan rates will worsen.