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Fed to cut rate in September Post Reply Rate topic
Pinnacle Master	10-Sep-2007 10:55        Pinnacle About Contact  Quote this Post!
x 0   x 0  Alert Admin	RBC For the US, on the other hand, we suspect that it is only a matter of time before we see a cut in Fed funds rate. Our official call is that the FOMC will lower Fed funds rate 50bp to 4.75% on September 18. However, just as the ECB deferred hiking in response to the liquidity issue, the Fed could defer easing because of the liquidity issue. In other words while the problem is one of liquidity and risk management and not the correct level of interest rates for the economic outlook, the Fed will be reluctant to ease, looking to address the crisis with alternative measures. Once there are clear signs that the crisis is spreading to the real economy then the Fed will likely respond by cutting rates, and probably immediately. Just as in Europe, last week?s PMI survey?s did not provide this evidence but pending home sales for July did collapse, flagging further weakness in the housing sector ahead. Meanwhile the payrolls numbers for August point to a deteriorating labor market. The Fed?s Beige Book suggests that the signs of weakness are not yet compelling enough to force the Fed?s hand this month but by the next meeting, scheduled for October 31, the situation may be rather different and the key issue is whether the Fed would wish to wait that long. We doubt it and look for a cut this month.
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Pinnacle Master	10-Sep-2007 10:51        Pinnacle About Contact  Quote this Post!
x 0   x 0  Alert Admin	So now, the voice calling the Fed to cut rate is getting louder and louder. Seem like that is the way to go on 18 Sep.
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Pinnacle Master	10-Sep-2007 10:38        Pinnacle About Contact  Quote this Post!
x 0   x 0  Alert Admin	UBS Investment Research The market remains in shock at the net contraction of 4000 non-farm payrolls in the US in August (versus consensus of +100k). While the message from the August numbers is that the jobs market is already showing the impact of the market turmoil, the cumulative downward revision of 81k in the June and July numbers suggests that the it was already weakening significantly even before the credit turmoil in August. Payrolls gains have averaged just 44k in the last three months, well below the 147k per month average in the preceding five months of the year and 189k in 2006. Admittedly, payrolls data can be volatile, and we caution against taking the August weakness too literally. Our economists highlighted that spending and output data have not corroborated the degree of weakness, and jobless claims have shown a relatively small rise thus far. But the weak payroll numbers clearly strengthen the case for a Fed rate cut at the September 18 meeting and 10-year Treasury yields fell to a 20-month low at 4.39% on Friday. Historically, a dip in the 10-year yield to the 4% mark has been a decent precursor to a recession. Our economists are now calling for a 25bp cut in each of the remaining meetings this year, 75bp in total, instead of the pre-payroll forecast of 50bp cuts, for the year. The major high-frequency data from now to the FOMC meeting are one more jobless claims report, retail sales, industrial production, the Michigan confidence survey, and the housing market index (HMI). Although the recently released Beige Book did not suggest significant broad weakening through August 27, we think none of these upcoming data are likely to change the FOMC?s bias for now, with most numbers likely to be poor, particularly HMI and jobless claims. Given that this is still seen as first and foremost a US-centric financial crisis, the US dollar is likely to do poorly against major currencies with adjustments in expectations of growth and rates differentials likely to work against the greenback for now, but the USD may find support when the relative impact of the market turmoil on the rest of the world becomes clearer. Ahead today, we have only the July consumer credit (UBSe: $7.5B, cons: $8.0B, after $13.1B) by way of data but four Fed officials will be speaking. Atlanta Fed President Lockhart and Fed Governor Mishkin will speak on the economic outlook, while San Francisco Fed President Yellen?s topic is ?A View from the Federal Reserve.? Dallas Fed Pres. Fisher will speak about the US and Mexican economies. For the week we have the August retail sales, industrial production, the trade deficit numbers, the important Michigan consumer sentiment index for early September and the  usual weekly jobless claims due. Fed Chairman Bernanke will speak on Tuesday about ?Global Imbalances.?
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Pinnacle Master	10-Sep-2007 10:33        Pinnacle About Contact  Quote this Post!
x 0   x 0  Alert Admin	DBS Research To cut or not to cut ? that was the question. Whether ?twas nobler to pierce the hearts of hedge funds and their patrons and, in the process, risk a little blood on Main Street ... or to ease the pain of the Commoner and suffer the same slings and arrows all over again at some future date? ?Twas a hot debate ... that is no more. August nonfarm payrolls, which fell by 4k, have mooted it ? crisply, cleanly and ever so regrettably. The first job losses in 4.25 years make it clear that Main Street is headed down, taking a load off of Fed Chairman Bernanke?s shoulders that a thousand of the Best and Brightest moral philosophers could never have hoped to lift. Dilemma? What dilemma? A cut, perhaps two. No questions asked. Bernanke just sailed through his first major crisis without having to utter a word. Surely such a dismal payrolls report never felt so good. But make no mistake ? the drop in August payrolls was not due to the credit market difficulties of the past 3-4 weeks in any way, shape or form. Hiring decisions / procedures take a good deal of time and Main Street has, as yet, been affected barely at all by the recent credit trouble on Wall Street. August payrolls fell for one simple reason: growth has been bad enough for long enough that employment ? always the ?laggingest? of indicators ? finally fell into step. GDP growth has averaged a truly miserable 2% (QoQ, saar) for the past year and a half and 2.2% for a full two years. This sort of GDP growth ? barely 2/3rds of potential ? eventually brings equally stunted job growth. And ?eventually? finally showed up at the door. To be sure, a 4k drop in payrolls is a tad overdone. Two percent GDP growth points to payrolls growth of 60k-80k per month, not to outright losses. But the jobs data are volatile and the weaker numbers are overdue. For both reasons, a drop of 4k is not terribly out of bounds.
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Pinnacle Master	10-Sep-2007 10:10        Pinnacle About Contact  Quote this Post!
x 0   x 0  Alert Admin	A comprehensive report from StanChart We shall make no bones about it: August?s US employment data was simply awful. The first outright fall in non-farm payrolls in three years and confirmation of weakness in the coincident data suggest a significant and immediate worsening in labour market conditions in the face of market turbulence. This marks a decisive swing away from inflation and toward growth risks, and requires monetary easing from the Federal Reserve from its September meeting. Ahead of the August employment reports, markets were already edging away from the consensus forecast of a 100k gain in nonfarm payrolls. Even so, the result, minus 4k, was a shock, while a net downward revision of 81k to June and July?s results suggest this is not just a one-off decline. Optimists will point to the fact that the public sector was partly responsible for the weakness in the August data (government payrolls were down 28k in the month) and contributed to around half of the downward revision to the prior two months. Unfortunately, other data within the reports hardly add to the optimists? case.  Financial services added zero net jobs in August, and that is likely to fall in the coming months as a result of recent market turmoil, and temp employment ? a leading indicator of employment ? continued its weakening trend The fact that manufacturing was responsible for the lion?s share of the weakness this month against a still-reasonable 60k addition to services payrolls suggests that services jobs are yet to feel the hit from recent market turbulence (the sharp fall in the non-manufacturing ISM?s employment component in August may be a more timely indicator of the shape of things to come for the sector). Meanwhile, the fact that the unemployment rate was unchanged at 4.6% is itself no indication of the underlying health of the labour market. The only reason that the unemployment rate was unchanged was that the number of people leaving the labour force altogether (340k according to the household survey, from which the unemployment rate is taken) overwhelmed the 316k fall in employment in the same month. Whichever way you dice it, August?s labour market data were bad. The Fed now has all the cover it needs to cut rates at the September meeting. Any concern about ?bailing out? Wall St. will now be explained away by the weakness in the labour market and possible downside risk to the economy from the recent credit market turmoil. Our long-held call (a call which, it should be noted, we stuck with most on Wall Street were expecting rates to head higher than 5.25%) had been that the Fed would cut a cumulative 75bps (25bps x 3) beginning in December. We have highlighted the risk that the cuts may come sooner, and today?s data have sealed the change. We now expect the Fed to bring forward those cuts beginning with 50bps in September (plus 25bps cuts in October and December), bringing the fed funds target rate to 4.25% by end year. For emerging markets, the job data will inevitably be viewed in a bad light. Equity markets across Asia are likely to follow the US in sympathy on Monday as fears of a US recession will add to concerns about EM economic growth. However, as we have consistently pointed out in recent months, EM fundamentals are now significantly more sound than was the case in the past, and stronger domestically driven growth, especially in Asia, and greater inter-regional trade flows should mean that from a relative value perspective EM outperforms in terms of both the real economy and in terms of asset markets in the medium term. Indeed, with economic growth across EM still very solid, the prospect of quicker and more substantial cuts from the Fed, in conjunction with a temporary halt to tightening on the part of other major central banks, over time could even prove to be a positive in absolute terms. In fact, our economic forecasts have for some time reflected thisdivergence in growth. We have for some time been anticipating expansion of just 1.5% in the US this year and 2.3% next, while at the same time forecasting a continuation of strong activity across a host of EM economies. We see no reason to now substantially change those calls, nor indeed to back-track on our expectation for tighter monetary policy in many EM economies too. The root of current market turbulence lies in the US, and its sub-prime mortgage market. The main response to that problem will come from the US too, in the shape of easing from the Federal Reserve.
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