Chmura Weekly Economic Update - Live

Special Presentation: Time for a recession?

info@chmuraecon.com — Tue, 20 Mar 2007 00:00:00 GMT

Listen to a Chmura Economic Update special presentation of Dr. Christine Chmura's latest article: Time for a recession? It depends on whom you are listening to.

Week of October 28, 2007

info@chmuraecon.com — Sun, 28 Oct 2007 00:00:00 GMT

Last week was light on economic data, while this week's calendar is loaded. Investors are anxiously awaiting the Federal Open Market Committee's (FOMC) policy statement to see whether further rate cuts will be taken. Other highly anticipated reports include advance gross domestic product for the third quarter, and October nonfarm payrolls. Last week included data indicating that the housing market continues to flounder, new orders of durable goods are showing weakness, and initial unemployment claims are on the rise. Existing home sales fell to an eight-year low in September, while volatile new home sales recovered slightly from a downwardly revised 11-year low in August. Durable goods orders unexpectedly declined and have fallen 7.0% in the past two months, but orders excluding defense rose 0.7% in September. Equities gained back some of what was lost the previous week, while oil futures surged to $91.86. Gold continues to climb and the dollar weakened against both the yen and the euro. Investors are currently pricing a 25 basis point (bp) rate cut at the FOMC meeting this week, with a slight chance of a 50 bp rate cut.

Week of September 2, 2007

info@chmuraecon.com — Sun, 02 Sep 2007 00:00:00 GMT

Despite the release of a large number of economic indicators last week, most investors were focused on words from the Fed that could hint at a federal funds rate cut in the near future. The minutes from the August 7 Federal Open Market Committee (FOMC) meeting were released early in the week and indicated that inflation was still the predominant policy concern. In a second Fed issued report, a letter from Fed Chairman Ben Bernanke to Senator Charles Schumer was released in which Bernanke said that the Fed was "closely monitoring developments in financial markets" while also discussing the efforts made by the Fed to alleviate problems in the credit markets. In the final Fed release, Ben Bernanke gave a speech at the Federal Reserve Bank of Kansas City's Economic Symposium on Friday and said "if current conditions persist in mortgage markets, the demand for homes could weaken further, with possible implications for the broader economy. We are following these developments closely." The financial markets responded positively to this speech, and investors now believe with a 100% probability that the Fed will cut the federal funds rate target 25 basis points to 5.00% at their September meeting.

Week of June 30, 2008

info@chmuraecon.com — Mon, 30 Jun 2008 12:00:00 GMT

The Federal Open Market Committee (FOMC) held the federal funds rate target at 2.00% citing softer labor markets, stressed financial markets, tighter credit conditions, and higher energy prices as reasons not to raise rates despite concerns about inflation. In the financial markets, the three major stock indices plunged and oil prices rose above $140 leading analysts to warn that a bear market is close at hand. While news from the financial markets was abysmal, economic reports were mixed. Negative news was highlighted by consumer confidence which plummeted to a more than sixteen year low as the expectations index recorded the lowest level since the survey began in 1967. On the positive side, income jumped 1.9% in May mainly because of the economic stimulus checks. Spending during the same month rose 0.4%. Based on the fed funds futures contracts, there is a 74.6% probability that the FOMC will again hold the federal funds rate target at 2.00% at their August 5 meeting.

Week of July 30, 2007

info@chmuraecon.com — Mon, 30 Jul 2007 00:00:00 GMT

Reports last week showed that the U.S. economy expanded at an exceptional pace in the second quarter despite a slumping housing market. Real gross domestic product (GDP) advanced at a 3.4% annual pace after only advancing 0.6% in the first quarter. The strong economic growth was coupled with slower inflation as the GDP deflator slowed from 4.2% in the first quarter to 2.7% in the second quarter. The struggling housing market has hampered growth and was illustrated in last week's reports, with existing home sales and new home sales falling 3.9% and 6.6% respectively in June. Investors have become more certain in recent weeks with respect to the Fed lowering the federal funds rate target as inflation slows. According to the federal funds futures contract, investors believe with an 86% probability that the Fed will lower the federal funds rate target by 25 basis points by the end of the year.

Week of April 30, 2007

info@chmuraecon.com — Mon, 30 Apr 2007 00:00:00 GMT

The economy continued to expand in the first quarter of 2007, although at a much slower pace than in previous quarters. In the first quarter of 2007, real gross domestic product (GDP) advanced at a 1.3% annualized rate (advance figure), down from 2.5% growth in the fourth quarter of 2006. As the economy continues to slow, consumer confidence has diminished as well. In April, the consumer confidence index fell 3.9% to 104 as consumers became uneasy of the present situation as well as what lies ahead for the economy. The housing market sent mixed signals last week with a substantial decline of 8.4% in existing home sales and a 2.6% increase in new home sales in March. The Federal Open Market Committee (FOMC) is expected to hold the federal funds rate target at 5.25% when it meets May 9; but with economic growth slowing at a faster-than-expected rate and core inflation moderating, futures contracts show that investors believe a 25 basis point cut will occur at the end of the year.

Week of May 28, 2007

info@chmuraecon.com — Mon, 28 May 2007 00:00:00 GMT

The small number of economic reports released last week was mixed. In the housing market, new home sales surged 16.2% to 0.981 million units at an annualized rate (MUAR) in April while existing home sales fell 2.6% to 5.990 MUAR for the month. News in the manufacturing sector was positive with durable orders growing at a 4.1% year-over-year rate, the first positive year-over-year pace in seven months. The news in the labor market, however, was negative as initial unemployment claims increased by 15,000 to 311,000 for the first monthly gain in six weeks. Other headlines included average gasoline prices reaching an all-time nominal high of $3.26 a gallon and retired Federal Reserve Chairman Alan Greenspan predicting "dramatic contraction" at some point in China's stock markets which contributed to a decline in every major stock index in the United States and several others globally on Wednesday. The Federal Open Market Committee (FOMC) is expected to hold the federal funds rate target at 5.25% through most of 2007. Investors have begun to show a diminishing belief that a rate cut of 25 basis points will come at the December 11 meeting, with federal funds futures contracts now pricing in a 65% probability of occurrence compared to 74% one week earlier.

Week of August 27, 2007

info@chmuraecon.com — Mon, 27 Aug 2007 00:00:00 GMT

Despite the small number of economic reports released last week, there was no shortage of news. The future outlook of the economy improved as the index of leading indicators advanced 0.4% in July and increased 0.1% from six months ago. This reading in the six-month change follows a 0.7% decline in June, only 0.3 percentage point from a level that signals recession. News in the housing market was mixed with new home sales increasing 2.8% in July; but Capital One, Lehman Brothers, and Accredited Home Lenders Holding all announced major layoffs in their mortgage sectors, a testament to the continued fallout from the housing market. Speculation that the Fed would lower the federal funds rate target mounted last week following a 50 basis point discount rate cut the week prior and Senator Dodd saying that Fed Chairman Ben Bernanke vowed to use "all tools available" to curb the financial market volatility. The federal funds futures contract is now pricing in a 51% probability that the Fed will lower the target federal funds rate 50 basis points prior to their September meeting.

Week of November 26, 2007

info@chmuraecon.com — Mon, 26 Nov 2007 00:00:00 GMT

The shortened Thanksgiving holiday week brought negative reports that the housing market continued to weaken. On the positive side, initial unemployment claims fell. Worries about the impact of the sub-prime mortgage market spill-over into the broader economy drove stock prices lower and bond prices higher over much of the week until Black Friday when consumer gave retailers a better-than-expected showing on the day after Thanksgiving. Many investors still seem to believe that the Federal Open Market Committee (FOMC) will lower the federal funds rate target at their next meeting despite comments from Fed officials suggesting that inflation remains too much of a concern to lower the funds rate again in December.

Week of March 26, 2007

info@chmuraecon.com — Mon, 26 Mar 2007 00:00:00 GMT

As expected, the Federal Open Market Committee (FOMC) decided to hold the federal funds rate target at 5.25% at last week’s meeting. In its statement, the Fed noted that, "Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth," dropping the past reference to "additional firming that may be needed" to counteract inflation pressures. Some investors interpreted this statement change as an end to the Fed's tightening bias. As a result, federal funds futures contracts are showing a high probability for a short-term interest rate cut at the August 7 FOMC meeting. While the Fed's statement noted the continued downturn in the housing sector, some of last week's housing reports were more positive. Housing starts rebounded in February after plunging in January, but building permits fell for the twelfth time in the last thirteen months. Meanwhile, existing home sales increased for the third consecutive month in February.

Week of February 27, 2007

info@chmuraecon.com — Mon, 26 Feb 2007 08:00:00 GMT

Last week's economic reports showed that inflation remains a concern. In January, the consumer price index (CPI) rose a greater-than-expected 0.2%. The core CPI (excluding food and energy) advanced 0.3% in January, while year-over-year growth accelerated to 2.7%. The minutes from the January 31 Federal Open Market Committee (FOMC) meeting show that Committee members still view inflation as the "predominant concern" but that threats for faster inflation should ease over time. Based on the FOMC minutes, many economists believe that the FOMC will continue to hold short-term interest rates steady in the coming months. Still, as economic growth moderates, the FOMC is expected to reduce the federal funds rate target by 25 basis points to 5.0% by the end of 2007.

Week of July 23, 2007

info@chmuraecon.com — Mon, 23 Jul 2007 00:00:00 GMT

Reports last week were generally positive with consumer and producer prices easing and industrial production growing. Both the consumer price index (CPI) and producer price index (PPI) slowed in June, on a year-over-year basis, to 2.7% and 3.2% respectively because of declining food and energy prices. The core CPI, which is used as a gauge of inflation, eased to 2.2% year-over-year and is near the Fed’s comfort zone of 1-2%. Industrial production grew 0.5% in June with the manufacturing, utility, and mining sectors all increasing output. The current condition of the housing market improved with housing starts increasing 2.3% in June, but the future outlook for continued growth is unlikely because building permits fell7.5% for the month. The Federal Open Market Committee (FOMC) minutes were released last week for the June 27-28 meeting where they anticipated "moderate economic growth in the coming quarters" while also fearing that "recent elevated readings posed some risks of a deterioration in inflation expectations." With these statements in hand and with the slowing rate of inflation, federal funds futures contracts are now pricing in a 43.4% probability that the Fed will lower the federal funds rate target by 25 basis points to 5.0% by the end of the year.

Week of April 23, 2007

info@chmuraecon.com — Mon, 23 Apr 2007 00:00:00 GMT

Consumer prices increased in March, as oil prices continue an upward trend. The consumer price index (CPI) grew 2.8% from a year ago, while core CPI (excluding food and energy) advanced a more comfortable 2.5% over the past year. Despite increasing prices, retail sales advanced a notable 0.7% for the month. The housing market also improved as both housing starts and building permits rose 0.8%. Industrial activity contracted according to last week's report with industry production falling 0.2% and capacity utilization declining to 81.4%. However, the decline was due to a weather-related drop in utilities. Manufacturing activity grew at a strong pace. Despite the much needed slowing in the pace of core inflation, the Federal Open Market Committee (FOMC) is expected to hold the federal funds target rate at 5.25% at its meeting on May 9. Federal funds futures contracts show that investors believe the federal funds target rate will remain at 5.25%, and a short-term interest rate cut of 25 basis points will not occur until late-2007.

Week of October 22, 2007

info@chmuraecon.com — Mon, 22 Oct 2007 00:00:00 GMT

An otherwise positive week of economic indicators was overshadowed by continued housing market woes. September housing starts and permits both fell more than expected and are now at 14-year lows with few signs of a turnaround. The decline in starts was led by multi-unit starts, which fell 36% from August. Oil futures stole headlines as well, setting several record highs before settling at $88.60 on Friday. Oil, the housing market, and credit market concerns combined to create a flight to safety, as bond prices rose across the board. Equities were hammered on Friday and the Dow Jones Industrial Average fell a whopping 4.1% for the week. The dollar struggled, depreciating 0.8% against the euro and 2.5% against the yen. Investors tilted their expectations back toward a federal funds rate cut at the October 30/31 Federal Open Market Committee (FOMC) meeting after a large upward revision to nonfarm payrolls had stalled momentum two weeks earlier. The consumer price index (CPI) rose slightly while the core CPI held, leading some to believe that the Fed correctly identified an economic slowdown as the greater current risk to the economy. Investors are currently pricing a 96.0% chance of a rate cut at the FOMC meeting next week.

Week of May 21, 2007

info@chmuraecon.com — Mon, 21 May 2007 00:00:00 GMT

Last week's economic reports showed improved current conditions in several areas of the economy, while the outlook for the future was less positive. The pace of inflation, as measured by the consumer price index (CPI), slowed to a 2.6% year-over-year pace in April while core CPI (excluding food and energy) slowed to a more moderate 2.4% year-over-year pace and inched closer to the Fed's "comfort zone." Housing starts increased to 1.528 million units at an annualized rate (MUAR) suggesting improving conditions in the housing market. However, building permits, which gives an indication of future housing activity, plummeted 8.9% for the month and reached the lowest level in nearly a decade. Also on the negative side, the index of leading indicators fell 0.5% for the third drop in four months. With inflation's continued moderation and slowing economic activity, federal funds futures contracts continue to suggest that the federal funds rate target will be cut 25 basis points in December.

Week of January 21, 2008

info@chmuraecon.com — Mon, 21 Jan 2008 00:00:00 GMT

Stock market indices continued to fall last week after worse-than-expected retail sales and housing reports. Retail sales fell 0.4% in December and housing starts plunged 14.2% in December to its lowest point in 17 years. Permits dropped to a 15-year low. Industrial production held steady but is decelerating on an annualized basis. The Conference Board's leading index is not yet sounding the recession warning but the declines in the components that make up the index are becoming more broad-based. On the positive side, initial unemployment claims have fallen for the last three weeks and point toward improvement in the labor market. And, higher commodity prices don't seem to be filtering through to the consumer. The core consumer price index decelerated to a 2.4% year-over-year pace in December. Most analysts expect the Federal Open Market Committee (FOMC) to reduce the federal funds rate target by 50 basis points when they meet on January 29 and 30 with an increasing number looking for a 75 basis point cut.

Week of August 20, 2007

info@chmuraecon.com — Mon, 20 Aug 2007 00:00:00 GMT

With a multitude of reports released last week, investors were most likely hoping that strong readings in key economic indicators would avert attention from the credit market and pull the financial markets out of the recent plunge. In the end, it took a 50 basis point cut in the discount rate, the rate at which member banks borrow funds directly from the Fed, to offset some of the large stock market losses early in the week. The Fed justified the move saying that "financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward." In lowering the discount rate the Fed's action targeted the banking industry in an attempt to increase liquidity. However, many investors feel that this action was a signal that the federal funds rate target will also be cut. The federal funds future contract is now pricing in a 62% probability that the Fed will cut the federal funds rate target 50 basis points by its meeting in September.

Week of November 19, 2007

info@chmuraecon.com — Mon, 19 Nov 2007 00:00:00 GMT

We expect real GDP growth to remain below 3.0% over the next year, however, concerns about accelerating inflation are likely to keep the Federal Reserve from lowering the federal funds rate target further. A declining dollar as well as higher oil prices will likely cause inflation to increase somewhat. Although the subprime mortgage issues will cause banks to tighten their lending policies, we do not expect liquidity issues to lead to recession.

Week of May 19, 2008

info@chmuraecon.com — Mon, 19 May 2008 00:00:00 GMT

Reports last week were mixed. On the positive side, the housing market improved (starts and building permits rose) and the consumer price index (CPI) and core CPI moderated. On the negative side, consumers continued to cut back on spending causing retail sales to edge down 0.2%. The industrial sector suffered with production slowing to its lowest year-over-year pace in more than four years and capacity utilization fell to the lowest level in over two years. While economic reports were mixed, the stock markets gained on the backs of the technology and energy sectors. Oil companies benefited from an agreement to suspend buying oil from the Strategic Petroleum Reserve for six months but the disappointment that Saudi Arabia will raise output by only 300,000 barrels a day led to oil prices closing at another all-time high of $126.68 a barrel. Based on federal funds futures contracts, investors believe with a 92% probability that the Federal Open Market Committee will hold the federal funds rate target at 2.00% at the June 24/25 meeting.

Week of March 19, 2007

info@chmuraecon.com — Mon, 19 Mar 2007 00:00:00 GMT

The consumer and producer price levels rose in February, while consumer spending on retail was weak, according to last week's economic reports. The consumer price index (CPI) advanced 0.4% in February, while the core CPI (excluding food and energy) increased 0.2%. At the wholesale level, the producer price index (PPI) jumped 1.3%, and the core PPI rose 0.4% in February. As prices increased, retail sales rose only 0.1% in February. On a more positive note, industrial production advanced 1.0% in February, while capacity utilization grew to 82.0%. With the continued gains in the price level, the Federal Open Market Committee (FOMC) is expected to hold the federal funds rate target at 5.25% when it meets this week. Futures contracts are pricing in a 98% probability that the FOMC will keep short-term interest rates steady when the 2-day meeting concludes on March 21.

Week of February 19, 2007

info@chmuraecon.com — Mon, 19 Feb 2007 00:00:00 GMT

Last week's economic reports showed weakness in several sectors of the economy. The level of retail sales was unchanged in January, while year-over-year growth continued to slow. In the housing market, the levels of both housing starts and building permits fell in January, although some of the decline can be attributed to cold temperatures. Industrial production dropped for the fourth time in five months in January, and output growth continued to decelerate on a year-over-year basis. The Federal Open Market Committee (FOMC) is expected to hold the federal funds rate target at 5.25% when it meets March 20-21. Some economists believe that the FOMC will cut short-term interest rates by late-2007.

Week of June 18, 2007

info@chmuraecon.com — Mon, 18 Jun 2007 00:00:00 GMT

Equities rebounded last week after a spike in the 10-year Treasury caused the largest decline in stock prices since March two weeks ago. Last week’s gains were attributed to positive economic data, the consumer price index (CPI) and retail sales in particular. Core CPI increased less than expected, while retail sales growth helped relieve concern of an impending plunge in consumer spending. The housing market is showing no signs of improvement as foreclosures reached a new high, following last month’s new high. Many analysts expect foreclosures to peak sometime in 2008. The housing market may also be slowing CPI growth. The Federal Open Market Committee (FOMC) is expected to hold rates steady at its meeting next week, and an increasing number of analysts expect the current rate of 5.25% to hold through the end of the year.

Week of September 17, 2007

info@chmuraecon.com — Mon, 17 Sep 2007 00:00:00 GMT

Last week's calendar was light on major economic releases and lacked a market shock such as the one created by nonfarm payroll data a week earlier. Retail sales were slightly worse than expected despite being propped up by automobile sales, which caused some minor concern in the market due to the importance of consumer spending. Consumer credit data indicated consumers borrowed significantly less in July than in June, but credit increased 12% from a year earlier. Industrial production was propped up by gains in utilities, while manufacturing production declined. Equities posted a solid week amid light trading and the yield on the 10-year Treasury declined as credit worries subsided somewhat. Investors are anxiously awaiting the decision of the Federal Open Market Committee (FOMC) on Tuesday. A 25 basis point reduction in the target federal funds rate is already assumed, with some betting on a 50 basis point cut. An FOMC decision to hold the target rate at the current 5.25% might cause a significant shock to the market. Investors are currently pricing a 58% chance of a 50 basis point cut at the September 18 FOMC meeting.

Week of July 16, 2007

info@chmuraecon.com — Mon, 16 Jul 2007 00:00:00 GMT

Consumers cut back on spending as gas prices rose and the housing recession reduced demand for housing-related items such as building materials, appliances, and furniture. Retail sales plunged 0.9% in June and year-over-year growth slowed to 3.8%. In addition to hampering retail sales, elevated gas prices were also the main contributor to the widening trade deficit. In May, the U.S trade deficit widened $1.3 billion to $60 billion as imports increased due to an increase in domestic spending on oil. This oil-induced gain in imports was somewhat offset by increased exports because a weaker dollar makes U.S. goods in the global market more competitive. Investors have maintained the belief that the Federal Open Market Committee will hold the federal funds rate target steady at 5.25% at its meeting on August 7. Based on federal funds futures contracts, investors put an 80% probability on the expectation that the federal funds rate target will not be lowered by the end of the year.

Week of April 16, 2007

info@chmuraecon.com — Mon, 16 Apr 2007 00:00:00 GMT

Last week's reports showed the effects of rising energy prices. In March, the producer price index (PPI) advanced 1.0%, as both food and energy prices increased for the month. Meanwhile, the core PPI (excluding food and energy) was unchanged in March. A lower price and volume of crude oil imports led to a slight decline in the trade deficit in February, but petroleum import prices jumped 9.0% in March. The Federal Open Market Committee (FOMC) remains concerned about inflation, according to the minutes from the March 20-21 meeting. With elevated levels of core inflation, the FOMC believes that future short-term interest rate hikes may "prove necessary." Still, the FOMC is expected to hold the federal funds rate target at 5.25% when it meets on May 9. Based on the prices of federal funds futures contracts, some investors believe that the FOMC will hold short-term interest rates steady until it cuts rates in late-2007.

Week of October 15, 2007

info@chmuraecon.com — Mon, 15 Oct 2007 00:00:00 GMT

Last week featured generally positive economic indicators, including a better-than-expected retail sales report. The producer price index (PPI) indicates that inflation risks have not increased significantly, which supports the Federal Open Market Committee (FOMC) decision to cut the federal funds rate target in September. Minutes were released from the September FOMC meeting which indicate that members considered inflation risks to have lessened in recent months, but the minutes did not provide any guidance for what the Fed's next move will be. Recent data have led to fewer bets on a further rate cut when the FOMC meets on October 30/31. The trade balance continues to improve, helped by a weakened dollar. Equities posted small gains; the NASDAQ led the way, gaining 2.9%. Oil and gold futures resumed their upward trends after a brief pause, while the dollar gained on the yen but slid against the euro. Yields on the short end of the Treasury curve rose as much as 20 basis points for the week, and the 10-year Treasury yield rose to 4.70% as fewer investors expect rate cuts at upcoming FOMC meetings. Investors are currently pricing a 32% probability of a 25-basis-point federal funds rate target cut at the October 30/31 meeting.

Week of May 14, 2007

info@chmuraecon.com — Mon, 14 May 2007 00:00:00 GMT

Reports last week suggest that U.S. producers and consumers are feeling the effects of higher energy prices. Retail sales growth slowed to a 3.2% year-over-year pace in April while gas stations experienced the fastest growth among all sectors for the month. The Producer Price Index (PPI) advanced 0.7% in April as wholesale energy prices grew 3.4% for the month. The effect of higher oil prices was also apparent in the trade deficit which increased by $6 billion because imports of oil increased due to higher prices and stable demand. As expected, the Federal Open Market Committee (FOMC) held the federal funds rate target at 5.25% at its meeting on May 9. The official release stated that "Economic growth slowed in the first part of this year and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to expand at a moderate pace over coming quarters. Core inflation remains somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures." Despite continued concerns about the pace of elevated core inflation and satisfactory economic growth, federal funds futures contracts indicate that the federal funds rate target will be cut 25 basis points in December.

Week of July 14, 2008

info@chmuraecon.com — Mon, 14 Jul 2008 12:00:00 GMT

The few reports released last week point to some improvement in the economy, but news from the financial industry continues to suggest the problems are far from over. On the positive side, initial unemployment claims dropped for the week ending with July 5 and the trade deficit narrowed. The price of oil was volatile during the week but finally ended Friday at $143.25 a barrel--down 1.4% from the previous week. Perhaps the biggest news came on Friday when mortgage lender IndyMac Bank was taken over by federal regulators. All the major stock market indexes closed lower last week with the S&P 500 index now joining the Dow Jones Industrial Average in an official bear market. As a result of worsening financial market conditions, the fed funds futures contract continues to price in a low probability that the Federal Open Market Committee (FOMC) will raise the fed funds rate target at their August 5 meeting.

Week of August 13, 2007

info@chmuraecon.com — Mon, 13 Aug 2007 00:00:00 GMT

As expected, the Federal Open Market Committee (FOMC) held the federal funds rate target at 5.25% at its meeting last week. According to the FOMC press release released after the meeting, "the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected." Several reports last week supported their concern of inflation only one week after a positive reading on the core personal consumption expenditures (PCE) index, which is the Fed's preferred gauge of inflation. U.S. productivity accelerated at a less-than-expected 1.8% annualized rate and the past three years of productivity estimates were revised down. Additionally, import prices jumped 1.5% for its sixth straight increase due to a 7.0% jump in oil prices. With credit conditions worsening and substantial stock market volatility, federal funds futures contracts are now pricing in a 64% probability that the Fed will cut the fed funds rate as soon as September.

Week of November 12, 2007

info@chmuraecon.com — Mon, 12 Nov 2007 00:00:00 GMT

Economic reports released last week generally supported the Federal Open Market Committee (FOMC) statement that the risks of inflation and slower economic growth are roughly balanced. Third quarter productivity growth surged while unit labor costs declined and the September trade balance unexpectedly narrowed despite rising oil prices. Both reports point toward a stronger-than-expected economy in recent months, though slower growth is forecast in the coming months. Balancing these reports was growth in consumer credit which was less than half of what economists expected as the holiday season approaches. It was a difficult week on Wall Street as equities tumbled. The NASDAQ fell 6.5%, while the Dow Jones Industrial Average lost 4.1%. Oil futures reached new highs and gold traded at levels not seen in decades. An announcement that China may adjust its foreign currency reserves contributed to yet another poor week for the dollar, which fell 3.6% against the yen. Investors continue to bet on further cuts in the federal funds rate target despite the Fed's recent statements that additional cuts are unlikely.

Week of March 12, 2007

info@chmuraecon.com — Mon, 12 Mar 2007 00:00:00 GMT

Last week's economic reports showed that growth in the labor market has moderated but unemployment remains low. In February, nonfarm payrolls expanded by 97,000, the smallest monthly gain in two years. Despite slower overall growth, the service-producing sectors experienced strong job gains in February, while goods-producing sectors contracted for the month. As payrolls increased modestly, the unemployment rate edged down to 4.5% in February. With continued job growth and a decreased unemployment rate, the probability of a short-term interest rate cut in the coming months has declined, but federal funds futures contracts are still predicting an interest rate drop by late-summer.

Week of September 10, 2007

info@chmuraecon.com — Mon, 10 Sep 2007 00:00:00 GMT

The events during the holiday-shortened week were largely overshadowed by the first employment decline in four years. In addition to the August decline, June and July numbers were revised sharply downward. The unemployment rate remained flat due to a decrease in the labor force, and hourly earnings appeared unaffected by the employment decline. A hot topic of late has been whether the Federal Reserve Open Market Committee (FOMC) will lower the federal funds rate target at its meeting later this month, with the debate alternating based on the economic statistics released that day. With the release of employment data this week, however, the debate is beginning to shift from whether there will be a cut to how much the cut will be. Investors are currently pricing an 88% chance of a 50 basis point cut at the September 18 FOMC meeting.

Week of July 9, 2007

info@chmuraecon.com — Mon, 09 Jul 2007 00:00:00 GMT

Reports released last week pointed toward stronger economic growth. Larger than expected employment gains in June were coupled with significant upward revisions to April and May numbers. Unemployment remains low but hourly earnings have not yet shown signs of increased pressure on labor costs despite the tight labor market. The Institute for Supply Management (ISM) index posted its fourth gain in five months to reach a 14-month high. The stock market gained around the mid-week holiday, spurred by an increase in announcements of mergers and acquisitions. Ten-year Treasury prices declined sharply in the second half of the week, erasing the previous week's gains. The Bank of England raised interest rates for the fifth time since August and investors expect at least one more increase in the near future, as the pound pushed near a 26-year high against the dollar. In contrast to continued inflation pressures in England, lower inflation in the United States has allowed the Federal Reserve to hold the target federal funds rate at 5.25% for over a year. Futures contracts are pricing only a 5.2% chance of a rate decrease at the Federal Open Market Committee (FOMC) meeting on August 7.

Week of April 9, 2007

info@chmuraecon.com — Mon, 09 Apr 2007 00:00:00 GMT

Last week's reports showed that the labor market remains strong, but news from the manufacturing sector was mixed. Nonfarm payrolls rose by a strong180,000 in March, following gains of 162,000 and 113,000 in the previous two months. With job growth remaining solid, the unemployment rate edged down to 4.4% in March, matching last October's five-year low. In the manufacturing sector, employment declined for the ninth consecutive month in March, while the ISM index suggested that growth in the sector has slowed. Factory orders increased in February but have declined on a year-over-year basis. With the labor market expanding at a healthy pace, the Federal Open Market Committee (FOMC) is expected to hold the federal funds rate target at 5.25% when it meets on May 9. Prices for federal funds futures contracts suggest that the FOMC could cut short-term interest rates by late-2007.

Week of May 7, 2007

info@chmuraecon.com — Mon, 07 May 2007 00:00:00 GMT

Last week's reports showed that the labor market weakened, while other news in the manufacturing industry was positive. Factory orders increased 3.1% in March, and the ISM index rose 3.8 points to 54.7 in April. Nonfarm payrolls were well below expectations only adding 88,000 jobs while the unemployment rate edged up to 4.5%. Worker productivity also slowed significantly to a 1.7% annualized pace in the first quarter compared to 2.1% in the prior quarter. With slower growth in the labor market, it's not surprising that consumer spending also eased. Moreover, the personal consumption expenditure (PCE) index, the Fed's preferred measure of inflation, fell to a 2.1% annualized growth rate, skirting the Fed’s "comfort zone" of 1-2%. With the pace of inflation ever closer to an acceptable level and economic growth slowing, federal funds futures contracts suggest that the Federal Open Market Committee will cut rates in December of this year.

Week of July 7, 2008

info@chmuraecon.com — Mon, 07 Jul 2008 12:00:00 GMT

Positive news was difficult to find last week. The outlook of the labor market worsened as nonfarm employment fell in June for the sixth straight month and initial unemployment claims jumped above 400,000 for the week of June 28 for only the second time since June 28. Other economic reports showed spending on construction fell in May for the eleventh time in twelve months, and purchases of domestic light vehicles dropped below 10 million units at annualized rate in June for the first time since April 1992. Conditions in the financial markets were not much better as all three major stock indices lost at least 1.5% of their value on Wednesday due to surging oil prices and stressed coal and steel producers. Oil prices continue to strain consumers' pockets growing 3.4% to $145.29 a barrel. Likely a result of worsening financial market conditions, the fed funds futures contracts are pricing in a 19.1% probability that the Federal Open Market Committee (FOMC) will raise the fed funds rate target to 2.25% at their August 5 meeting compared to a 25.4% probability one week earlier.

Week of August 6, 2007

info@chmuraecon.com — Mon, 06 Aug 2007 00:00:00 GMT

Growth in core inflation slowed to a pace within the Fed's comfort zone of 1-2% in June. The core personal consumption expenditure (PCE) index, the Fed's preferred measure of inflation, grew at an annual pace of 1.9% in June giving the Fed some leeway to relax their restrictive monetary policy. In addition to the slower pace of inflation, the consumer confidence index rose to a six-year high because consumers felt better about the current economic situation and were more positive about the future. Despite a good reading on consumer confidence, reports last week showed that nonfarm payrolls increased a less-than-expected 92,000 and advanced at a year-over-year pace of 1.4%, the slowest pace since July 2004. Investors are essentially unanimous in the belief that the Federal Open Market Committee (FOMC) will hold the federal funds rate target at 5.25% at its meeting this week, but federal funds futures contracts are pricing in a 50% probability that the fed funds rate target will be lowered 25 basis points to 5.0% at the October meeting.

Week of November 5, 2007

info@chmuraecon.com — Mon, 05 Nov 2007 00:00:00 GMT

A loaded economic calendar and a Federal Open Market Committee (FOMC) meeting provided plenty of economic excitement last week. The FOMC cut the federal funds rate target by 25 basis points as the market had expected. Real GDP beat expectations by posting 3.9% growth in the third quarter, and a nonfarm payrolls gain of 166,000 was nearly double the consensus expectation. The unemployment rate held at 4.7% and core personal consumption expenditures (PCE) held at 1.8%, within the 1-2% range that the Fed appears to favor. All of this good news may sound like it should have spurred a significant equities rally but that was not the case. After a modest rally following the FOMC statement on Wednesday, equities fell on Thursday as credit market concerns resurfaced. Also weighing on the market was the FOMC comment cautioning against an expectation of further rate cuts in the near future, as the risks of inflation and slower economic growth are considered to be balanced. Oil futures surged to over $95 a barrel and the dollar continued to weaken. Consumer confidence and the ISM index were lower than expected, while growth in commercial construction helped balance another decline in residential.

Week of March 5, 2007

info@chmuraecon.com — Mon, 05 Mar 2007 08:00:00 GMT

The economy continues to expand, although at a slower pace than previously reported. In the fourth quarter of 2006, real gross domestic product (GDP) rose at a 2.2% annualized rate (preliminary figure), revised downward from 3.5% in the advance report. After increasing at a solid pace in the fourth quarter, consumer spending remained healthy in January, as strong income growth helped to spur consumption. The Federal Open Market Committee (FOMC) is still expected hold the federal funds rate target at 5.25% when it meets March 20-21; however, with economic growth moderating more than originally reported, futures contracts are pricing in about an 80% probability that the FOMC will lower the federal funds rate target to 5.0% at its June27-28 meeting.

Week of June 4, 2007

info@chmuraecon.com — Mon, 04 Jun 2007 00:00:00 GMT

The holiday-shortened week started slow, with most of the economic releases occurring at the end of the week. Real gross domestic product (GDP) was revised downward further than expected to just 0.6% for the first quarter. Analysts are attributing the slow growth to transient factors and expect growth rates above 2.0% for the rest of 2007. Growth in personal income also came in lower than expected in April at -0.1%. Other indicators provided more positive news, as nonfarm payroll growth picked up in May after the smallest gain in two years in April, and the core personal consumption expenditure index slowed to a 2.0% year-over-year rate in April, the high end of the Federal Reserve's "comfort zone." The expectation that GDP growth will pick up in coming quarters, combined with lower inflation has led to a diminishing belief that the Federal Open Market Committee (FOMC) will cut rates later this year, as was previously expected.