Last week the U.S. Federal Reserve Open Market Committee decided to lower its target for the Federal Funds rate by 50 basis points to 3 percent. The Fed Board of Governors justified its decision by saying that downside risks to growth remain while inflation is expected to moderate in coming quarters. The Fed also expressed its concern that “financial markets remain under considerable stress, and credit has tightened further for some businesses and households”. Yet, the decision to cut rates was not unanimous. Voting against it was Richard W. Fisher, who preferred no change in the target for the federal funds rate at this meeting. Looking ahead, the next Fed meeting is on March 18 and according to futures trading on the Fed Funds rate, traders are fully pricing a 25 bps rate cut and as much as 72 percent probability of a 50 bps rate cut to 2.5 percent.
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| Credit Market | Last Week | Current | Change | % Change | Outlook * |
| DJ Credit Default Swaps | 106.7682 | 117.3554 | 10.5872 | 9.92% | Deteriorating |
| 10 Year Junk-Bond Spread | 616 | 603 | -13.0797 | -2.12% | Improving |
| Credit Card Delinquencies | 3.92 | 3.93 | 0.01 | 0.01% | Deteriorating |
| Mortgage Delinquencies | 5.12 | 5.59 | 0.47 | 0.47% | Deteriorating |
| Stock Market | Last Week | Current | Change | % Change | Outlook |
| Dow Jones Industrial Average | 12480.3 | 12265.13 | -215.17 | -1.72% | Deteriorating |
| Dow Jones Real State Index | 255.35 | 252.18 | -3.17 | -1.24% | Deteriorating |
| Dow Jones Financial Index | 565.96 | 551.16 | -14.8 | -2.62% | Deteriorating |
| Dow Jones Retail Index | 105.49 | 104.09 | -1.4 | -1.33% | Deteriorating |
| S&P Volatility | 27.32 | 28.24 | 0.92 | 0.92% | Deteriorating |
| Economic Indicators | Previous | Current | Change | % Change | Outlook |
| Mortgage Applications | -11.6 | 3 | 14.6 | 14.60% | Improving |
| New Home Sales | 634 | 604 | -30 | -4.73% | Deteriorating |
| Personal Spending | 1 | 0.2 | -0.8 | -0.80% | Improving |
| Personal Income | 0.4 | 0.5 | 0.1 | 0.10% | Improving |
| PCE | 3.6 | 3.5 | -0.1 | -0.10% | Improving |
| Initial Jobless Claims | 357 | 375 | 18 | 5.04% | Deteriorating |
Improving outlook means the Federal Reserve could use this indicator to
support a rate hike. The opposite stands for a deteriorating outlook.
CREDIT MARKET: HOW IS IT DOING?
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A DEEPER LOOK INTO THE CHANGES THIS WEEK:
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STOCK MARKET: HOW IS IT DOING?
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A DEEPER LOOK INTO THE CHANGES THIS WEEK:
| The Dow and its major sub-indices resumed their medium-term downtrend, falling significantly to start the current week of trading. Yet it is interesting to note that the Retail Index has outperformed the broader market, as fears of a recession should intuitively force sizeable losses in consumer-linked industries. The slight divergence suggests that markets feel that this is a Financials-led recession, and subsequent implications for Federal Reserve Monetary Policy are less clear. Much like the Fed, we will be in a “wait and see” mode in terms of economic data and potential effects on interest rate outlook. |
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U.S. CONSUMER: HOW ARE THEY DOING?
| The outlook for the domestic consumer continues to deteriorate, as dismal Non Farm Payrolls data and fast-rising unemployment insurance claims clearly worsen outlook for domestic labor trends. The Federal Reserve has surely taken note, with aggressive rate cuts and a proposed fiscal stimulus aimed at boosting consumption throughout the broader economy. Whether or not this will be enough to stave off a recession is yet to be seen, but few are optimistic for consumption prospects through 2008. | |
A DEEPER LOOK INTO THE CHANGES THIS WEEK:
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