Futures Market 100% Certain Fed Will Cut The Prime Rate At Or Before The October 29 Fed Meeting

Earlier today, the U.S. House of Representatives said "no" to the Bush administration's plan to spend around $700 billion to buy up the bad debt that has brought Wall Street to its knees. The vote was 228-205. Investors reacted to the failed bill by selling, hard. At today's close, the Dow Jones Industrial Average (DJIA) lost 777.68 points (6.98%) to close at 10,365.45. The broader S&P 500 Index shed 106.62 points (8.79%) to close at 1,106.39.

A good time for a bear market update:

• Since closing with record highs on October 9, 2007, the DJIA has now declined by 3,799.08 points (26.821%), while the S&P 500 Index has given up 458.76 points (29.311%.)

In other news, the federal government has brokered a deal in which Citigroup will buy the banking operations of Wachovia for $2.1 billion in stock; Citi will also take on $53 billion of Wachovia's debt. Last week, the Federal Deposit Insurance Corporation (FDIC) brokered a deal in which JPMorgan Chase bought the deposits, assets and certain liabilities of Washington Mutual's (WaMu) banking operations. WaMu had $188 billion in deposits; those customers are now Chase customers. Chase in now the #1 U.S. bank in terms of total deposits.

Shares of Wachovia (WB) fell 81.6% today to close at $8.16 per share, while shares of Washington Mutual are currently trading at $0.1604 per share.

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As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 100% (as implied by current pricing on contracts) that the Federal Open Market Committee (FOMC) will vote to cut the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at or before the October 29^TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

• Current odds that the Prime Rate will be cut by at least 25 basis points at or before the October 29^TH, 2008 FOMC monetary policy meeting: 100% (certain)
  
  
• NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)
  

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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Futures Market 86% Certain Fed Will Cut The Prime Rate At The October 29 Fed Meeting

Yesterday, the National Association of Realtors® released its report on sales of previously occupied homes for August. Nationwide, existing homes sales dropped by 2.2% last month, and were down 10.7% for the August 2007 - August 2008 period. The median price on a used home dropped to $203,100, while the average price dipped to $245,400. Click here for historical prices and a chart.

Earlier today, the Commerce Department reported that sales of newly built homes fell by 11.5% last month, and were down by 34.5% for the August 2007 - August 2008 period. The median price for a newly built home fell to $221,900, while the average price slid to $263,900. Click here for historical prices and a chart.

In other economic news:

• New claims for unemployment benefits came in at 493,000 for last week, significantly higher than the 445,000 Wall Street economists were expecting.
  
  
• New orders for durable goods -- items built to last at least 3 years -- declined by 4.5% for August. Economists were expecting a decline of about 1.6%.

With regard to the Bush Administration's plan to spend an estimated $700 billion to buy up distressed mortgage-backed securities and other toxic loans, President Bush had this to say:

"...Without immediate action by Congress, America could slip into a financial panic, and a distressing scenario would unfold..."

In testimony before Congress yesterday, Federal Reserve boss Ben Bernanke made these comments:

"...Despite the efforts of the Federal Reserve, the Treasury, and other agencies, global financial markets remain under extraordinary stress. Action by the Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy. In this regard, the Federal Reserve supports the Treasury's proposal to buy illiquid assets from financial institutions. Purchasing impaired assets will create liquidity and promote price discovery in the markets for these assets, while reducing investor uncertainty about the current value and prospects of financial institutions. More generally, removing these assets from institutions’ balance sheets will help to restore confidence in our financial markets and enable banks and other institutions to raise capital and to expand credit to support economic growth..."

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As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 86% (as implied by current pricing on contracts) that the Federal Open Market Committee (FOMC) will vote to cut the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the October 29^TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

• Current odds that the Prime Rate will be cut by at least 25 basis points at
  the October 29^TH, 2008 FOMC monetary policy meeting: 86% (likely)
  
  
• NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)
  

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

>  SITEMAP  <

Sixth FOMC Meeting of 2008 Adjourned: The Prime Rate Remains at 5.00%

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its sixth monetary policy meeting of 2008 and has voted to leave short-term interest rates at their current levels. Therefore, the benchmark Federal Funds Target Rate will remain at 2.00%, and the Wall Street Journal® Prime Rate (also known as the U.S., Fed or national Prime Rate) will remain at the current 5.00%.

Here's a clip from the press release that has just been issued by the FOMC:

"The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.

Strains in financial markets have increased significantly and labor markets have weakened further. Economic growth appears to have slowed recently, partly reflecting a softening of household spending. Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.

The downside risks to growth and the upside risks to inflation are both of significant concern to the Committee. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Ms. Cumming voted as the alternate for Timothy F. Geithner"

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Futures Market 98% Certain The Fed Will Cut Short-Term Rates Today

The futures market is pushing hard for a rate cut today, but most Wall Street economists believe that the Fed will leave short-term rates unchanged when the Federal Open Market Committee (FOMC) adjourns its monetary policy meeting later this afternoon. So, even though the fed funds futures market is nearly 100% certain that the Fed will cut rates at 2:15 pm EST, in reality, the odds are about 50/50.
The reason for the uncertainty: the fate of insurance giant American International Group (AIG) is still unknown. Wall Street has no idea if AIG will be forced to declare bankruptcy or become the next major American financial institution to be rescued by a Fed-brokered bailout. Though nobody is willing to lend money to AIG, a rescue is the more likely scenario, since the company is solvent.

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As of Monday evening, the investors who trade in fed funds futures at the Chicago Board of Trade had odds at 98% (as implied by current pricing on contracts) that the FOMC will vote to cut the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at today's monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

• Current odds the Prime Rate will be cut by at least 25 basis points at today's
  FOMC monetary policy meeting: 98% (very likely)
  
  
• NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)
  

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

>  SITEMAP  <

Fed Futures Turnaround: Odds On A Rate Cut for Tomorrow Currently At 66%

Lehman Brothers, founded in 1850 and, until recently, America's fourth largest investment bank, filed a petition for Chapter 11 Bankruptcy in a New York court today. A government bailout was considered, but in the end, top officials in the federal government decided that if Lehman could not find a buyer, then Lehman should be left to die. The U.S. government bailed out Bear Stearns indirectly, and rescued mortgage giants Fannie Mae and Freddie Mac. Now the purse strings have been cinched. Shares of Lehman closed at $0.21 per share today. On September 17, 2007, the stock was trading at $57.59 per share.

Merrill Lynch fared better: yesterday, the Bank of America announced that it will purchase Merrill in a $50 billion, all-stock arrangement. Not a fire sale price, but pretty close.

Who would have thought that subprime lending would cause such mayhem and destruction on Wall Street, and change the American financial landscape forever.

The Bear Market Is Back

Investors reacted to the news of Lehman's downfall with extreme bearishness. The Dow Jones Industrial Average (DJIA) lost 504.48 points (4.417%) today, while the broader S&P 500 Index lost 59 points (4.714%). Shares of DJIA component American International Group (AIG) lost 7.38 points (60.791%) to close at $4.76 per share today. AIG shares were trading at $63.45 a year ago. AIG is strapped for cash. The insurance giant may go the way of Lehman Brothers if the company isn't able to get access to about $70 billion by Wednesday.

Since closing with record highs on October 9, 2007, the DJIA has now dropped 3,247.02 points (22.924%), while the S&P 500 has shed 372.45 points (23.796%.)


Perhaps the only piece of good news today: crude oil for future delivery is currently trading at $92.55 per barrel in New York. That's a decline of $54.72 (37.156%) since crude hit a record high of $147.27 per barrel on July 11 of this year. Cheaper crude translates to an improved inflation outlook, which in turn makes it easier for the Federal Open Market Committee (FOMC) to cut rates tomorrow, if the group decides a cut is necessary. If the stock market slide continues tomorrow morning, then the odds on a rate cut for tomorrow afternoon will increase dramatically. Stay tuned!

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As of Monday evening, the investors who trade in fed funds futures at the Chicago Board of Trade had odds at 66% (as implied by current pricing on contracts) that the FOMC will vote to cut the benchmark Federal Funds Target Rate by 25 basis points (0.25 percentage point) at the September 16^TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

• Current odds the Prime Rate will be cut by 25 basis points at tomorrow's
  FOMC monetary policy meeting: 66% (more likely than unlikely)
  
  
• NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)
  

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

>  SITEMAP  <

Futures Market 92% Certain Prime Rate Will Remain at 5.00% After September 16 Fed Meeting

The Federal National Mortgage Association (FNMA), a.k.a Fannie Mae, and the Federal Home Loan Mortgage Corporation (FHLMC), a.k.a Freddie Mac, are now under the conservatorship of the Federal Housing Finance Agency (FHFA). In other words, the U.S. government is now running both mortgage behemoths. The CEO's of both firms are being replaced with Wall Street veterans. Former Merrill Lynch vice chairman Herbert M. Allison will take the helm at Fannie Mae, while former US Bancorp chairman David M. Moffett will be the new boss at Freddie Mac.

How big are Fannie and Freddie? The two companies are associated with about half of America's $12 trillion mortgage market.

Nobody knows how much the bailout will cost American taxpayers, but estimates are in the tens of billions of dollars. Not a bad investment considering how important the two companies are to the well being of global financial markets. For some perspective, compare this estimate to the $12 billion per month price tag attached to the current Iraq war.

It's now abundantly clear that the government won't let the mortgage giants fail, so the mortgage-backed securities issued by Freddie and Fannie are now more attractive to investors on Wall Street. This will translate to cheaper fixed-rate mortgages for American home buyers. News of the government takeover was announced yesterday and, as a direct result, 30-year, fixed-rate mortgages got cheaper today.

The holders of Fannie and Freddie stock have not fared well since the two companies started to deteriorate:

• On September 7, 2007, shares of Fannie Mae closed at $60.25 per share. Today, the stock lost 6.31 points (89.63%) to close at $0.73 per share.
  
  
• On September 7, 2007, shares of Freddie Mac closed at $56.93 per share. Today, the stock lost 4.22 points (82.75%) to close at $0.88 per share.

Financial markets across the globe will cheer the takeover. Without a doubt, the Chinese government will breath a sigh of relief: 10% of China's GDP is invested in Fannie and Freddie.

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As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 92% (as implied by current pricing on contracts) that the Federal Open Market Committee (FOMC) will vote to leave the benchmark Federal Funds Target Rate at the current 2.0% at the September 16^TH, 2008 monetary policy meeting. 4% in the market are betting on a 25 basis point (0.25 percentage point) cut next week, while the remaining 4% are betting that the Fed will opt for a 25 basis point increase.


Summary of the Latest Prime Rate Forecast:

• Current odds that the Prime Rate will remain at the current 5.0% after the September 16^TH, 2008 FOMC monetary policy meeting: 92% (likely)
  
  
• Current odds that the Prime Rate will remain at the current 5.0% after the October 29^TH, 2008 FOMC monetary policy meeting: 87% (likely)
  
  
• NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)
  

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

>  SITEMAP  <

Futures Market 88% Certain Prime Rate Will Remain at 5.00% After September 16 Fed Meeting

The fed-funds futures market had a number of attention-grabbing bits of economic news to digest this week:

• From the Commerce Department: construction spending fell by 0.6% during July, while new orders for manufactured goods advanced by 1.3% during the same month.
  
  
• On Tuesday, the Institute for Supply Management reported that its Purchasing Manager's Index (PMI) declined from 50.0 for July to 49.9% for August. This 0.1% difference may seem insignificant, but any figure above 50% suggests that, in general, the American manufacturing sector is expanding, while any figure below 50% suggests contraction. So, between the beginning of July and the end of August, American manufacturing went from stagnant to shrinking.
  
  
• During the second quarter of 2008, non-farm productivity increased by 4.3%, while unit labor costs declined by 0.5%, according to a report released by the Labor Department on Thursday. Without a doubt, this is good news for American corporations and business owners: that guy or gal in the corner office is always looking for ways to run a more efficient shop and thus improve the company's bottom line. This particular piece of economic news isn't positive from a consumer spending perspective, however, since it implies that American workers were more productive while at the same time earned less money.
  
  
• Earlier today, the Labor Department reported that the American economy shed another 84,000 jobs last month, and the unemployment rate jumped from 5.7% for July to 6.1% for August. The last time the U.S. economy actually added jobs was back in December of 2007.
  
  
• A few hours ago, crude oil for future delivery ended the week at $106.23 per barrel. Crude hit a record high of $147.27 on July 11; that's a decline of $41.04 (27.867%.)
  
  
• Wall Street money continued to move to the safety of U.S. Treasuries this week. The yield on the 10-Year Treasury Note fell from 3.813% on August 29 to 3.66% today.
  

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As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 88% (as implied by current pricing on contracts) that the FOMC will vote to leave the benchmark Federal Funds Target Rate at the current 2.0% at the September 16^TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

• Current odds that the Prime Rate will remain at the current 5.0% after the September 16^TH, 2008 FOMC monetary policy meeting: 88% (likely)
  
  
• Current odds that the Prime Rate will remain at the current 5.0% after the October 29^TH, 2008 FOMC monetary policy meeting: 85% (likely)
  
  
• NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)
  

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

>  SITEMAP  <