The Federal Reserve Open Market Committee has cut the fed funds rate by 100 basis points since September 2007 amid growing concerns about the health of the U.S. economy. Yet, despite the recent easing of financial conditions, traders remain pessimistic about the extent of the US subprime loan meltdown. Expectations for the outcome of the January 31 FOMC meeting changed dramatically on Tuesday after a key report on retail sales for December came in much weaker than expected. According to futures trading on the Fed Funds rate, traders are fully pricing a 50 bps rate cut and as much as 46 percent probability of a 75 bps rate cut to 3.75 percent.
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CREDIT MARKET: HOW IS IT DOING?
A DEEPER LOOK INTO THE CHANGES THIS WEEK
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Credit markets remain extremely tight as the spread between junk-rated corporate bonds and U.S. Treasuries surged more 11 bps to trade close to 608 bps.
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Although we have seen some signs of improvement on the U.S. lending market, short term interbank lending rates remain well above government bond yields of similar maturity.
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STOCK MARKET: HOW IS IT DOING?
A DEEPER LOOK INTO THE CHANGES THIS WEEK:
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Fears of a possible US borne recession are growing quickly. A few weeks ago, the popular consensus for fourth quarter growth sought a 1.0 percent pace of annualized growth. However, this projection, and the outlook for 2008, has deteriorated substantially as the consumer sector seems to be loosing its footing. Adding to clear signs that employment trends were waning and consumer sentiment was falling fast, a 0.4 percent drop in retail sales over the crucial holiday shopping month of December confirmed that domestic consumption was offering little help to the US economy.
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U.S. CONSUMER: HOW ARE THEY DOING?
A DEEPER LOOK INTO THE CHANGES THIS WEEK:
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Extreme volatility in Mortgage Applications likely reflects the underlying difficulty in obtaining mortgage credit. This has coincided with further routs in all relevant housing sales indicators, and the confluence of falling credit demand on home sales underlines the difficulty in the domestic real estate sector. Such dismal housing data has unsurprisingly coincided with weak end-of-year Retail Sales figures, and it seems only a matter of time before the ongoing housing recession places a clear dent on overall household consumption.
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Continued stock market routs have unsurprisingly left housing-linked stocks at further lows, but a recent bid for troubled mortgage lender Countrywide Financial has given the stock some much needed support in days past. Indeed, the stock price nearly doubled within a single trading day, and any further buyouts of distressed financial firms could potentially bolster outlook for the broader sector. It seems relatively clear that all mortgage and housing-linked firms may see further difficulty through the medium term, but there remains a glimmer of hope that such corporations may survive on significant capital infusions. |
