50 Basis Point Cut Fully Priced In for December 16

The fed funds futures market had plenty of economic news and data to digest this week (details below.) Earlier this year, the Fed was concerned about inflation. Now it's disinflation and the prospect of deflation that's got Fed economists worried, as prices fall and credit markets remain petrified.

Traders are still 100% certain that the Fed will cut the benchmark fed funds target rate by at least 25 basis points (0.25 percentage point) at the next Federal Open Market Committee (FOMC) meeting on December 16. Currently, 16% in the market are betting that the Fed will cut rates by 75 basis points next month.

Factors that (likely) influenced the fed funds futures market this week:

• On Wednesday, the Labor Department reported that its Consumer Price Index (CPI) declined by 1.0% during October. This was the biggest retreat for the index since the government started tracking consumer prices back in 1947. Wall Street Economists were expecting a decline of about 0.7% for October.
  
  
• Also on Wednesday, the Commerce Department reported that housing starts declined by 4.5% last month, and by 38.0% between 10/2007 and 10/2008. Housing starts came in at a seasonally adjusted and annualized rate of 791,000 for October, which is the weakest figure for this metric since the government began tracking housing starts back in 1959.
  
  
• Wednesday also saw the release of the minutes from the Fed's October 28-29 FOMC meeting (short-term rates were cut by 50 basis points at that meeting.) Here are a couple of clips:
  
  

  "...Several participants observed that it would be crucial for such policy actions to be unwound appropriately as the financial situation normalized. However, participants also observed that unfolding economic developments could require the FOMC to further lower its target for the federal funds rate in the future and to review the adequacy of its liquidity facilities..."
  
  "...Members anticipated that economic data over the upcoming intermeeting period would show significant weakness in economic activity, and some suggested that additional policy easing could well be appropriate at future meetings. In any event, the Committee agreed that it would take whatever steps were necessary to support the recovery of the economy..."

  
  
• The nation's Leading Economic Indicators declined by 0.8% last month, according to Thursday's reported from The Conference Board. Wall Street Economists were expecting a decline of around 0.6% for October.
  
  
• Thursday also saw the release of the Labor Department's weekly report on new claims for unemployment benefits. There were 542,000 new claims during the week that ended on November 15, which was 37,000 more than Wall Street forecasters were expecting. There are now more than 4 million Americans on the dole, which is the most since December, 1982.
  
  
• Another key report released Thursday was the Philadelphia Fed's diffuse index of current manufacturing conditions in the Fed's Third District, which slid from -37.5 for October to -39.3 for this month. The November figure is the lowest since October of 1990. Wall Street economists were expecting the figure to come in at around -35.0 for November. The Federal Reserve's Third District includes all of Delaware, the southern half of New Jersey and most of Pennsylvania.
  
  
• The Japanese economy, second only to the United States in size, is officially in recession, as are the Hong Kong and Singapore economies.
  
  
• The effective fed funds rate, which is the actual rate (average) at which American commercial banks made overnight loans to each other via the Fed, was last reported at 0.65% today, and was 0.42% a week ago, according to the Wall Street Journal. The current target for the fed funds rate is 1.00%.
  
  
• Mortgage leviathans Freddie Mac and Fannie Mae are suspending foreclosure sales and evictions on occupied, single-family homes from November 26, 2008 through January 9, 2009. Happy holidays.
  
  
• Crude oil for future delivery ended the week at $49.93 per barrel in New York. That's a decline of $54.62 (52.243%) since crude closed at $104.55 per barrel on September 19, 2008.
  
  
• Massive volumes of cash are still moving to the safety of government debt, even to shorter-term Treasuries which are currently offering close to nothing in return. The yield on the benchmark 10-Year Treasury Note fell to 3.167% today, while the yield on the 3-Month Treasury Bill fell to 0.01%.
  
  
• Breaking news that President-elect Obama is likely to nominate current New York Fed boss Timothy Geithner to be the next Treasury Secretary acted as an adrenaline shot for stocks. With less than an hour before the closing bell, stocks rebounded hard on the news. The Dow Jones Industrial Average (DJIA) shot up by more than 500 points to end the day with a gain of 494.13.
  
  
• Despite today's Geithner-inspired rally, the 3 major stock market indexes (1, 2, 3) ended lower on the week and declined to year-to-date lows. Bear Market Update: since closing with record highs on October 9, 2007, the DJIA has now lost 6,118.11 points (43.193%), while the broader S&P 500 Index has declined by 765.12 points (48.885%). The record high for the DJIA is 14,164.53; for the S&P 500 Index it's 1,565.15.

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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 FOMC will vote to cut the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the December 16^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 December 16^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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From The Fed Funds Futures Market: Fed Will Cut Its Benchmark Rate by At Least 0.25 Percentage Point on December 16

The fed funds futures market is still 100% certain that the Fed will cut the benchmark fed funds target rate by at least 25 basis points (0.25 percentage point) at the next Federal Open Market Committee (FOMC) meeting on December 16. An 84% majority in the market is betting that the Fed will cut by 50 basis points next month.

Factors that (likely) influenced the fed funds futures market this week:

• The eurozone is in recession, having contracted for two straight quarters. The eurozone, i.e. the European nations that share the euro currency, is comprised of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, The Netherlands, Portugal, Slovenia, and Spain. It's the first recession for the eurozone since it's creation back in 1999.
  
  
• Earlier today, the Commerce Department reported that U.S. food services and retail trade, also known as retail sales, declined by 2.8% last month. This was the sharpest retreat for retail sales since the government created the economic gauge back in 1992.
  
  
• Across the country, there were 516,000 new claims for unemployment benefits last week, according to Thursday's report from the Labor Department. Wall Street economists were expecting around 482,000 new jobless claims.
  
  
• At a speech before a central banking conference in Frankfurt, Germany, Fed boss Ben Bernanke made the following comments:
  

  
  "...The efforts by central banks around the world to increase the availability of liquidity, along with other steps taken by central banks and governments, have contributed to tentative improvements in credit market functioning. However, the continuing volatility of markets and recent indicators of economic performance confirm that challenges remain. For this reason, policymakers will remain in close contact, monitor developments closely, and stand ready to take additional steps should conditions warrant..."

• The Federal Reserve has approved the proposal made by industrial loan company American Express to become a bank holding company.
  
  
• The effective fed funds rate, which is the actual rate (average) at which American commercial banks made overnight loans to each other via the Fed, was last reported at 0.42%, and was 0.37% a week ago, according to the Wall Street Journal. The current target for the fed funds rate is 1.00%.
  
  
• On Wednesday, the Federal Reserve reported the results of its latest, $150 billion money auction, also known as the Term Auction Facility. Sixteen banks were awarded loans that will mature on January 8, 2009. These banks will pay an interest rate of 0.528% when these loans mature.
  
  
• Crude oil for future delivery ended the week at $57.04 per barrel in New York. That's a decline of $88.25 (60.741%) since crude closed at $145.29 per barrel on July 4, 2008.
  
  
• Mortgage behemoths Fannie Mae and Freddie Mac announced plans to speed up loan modifications for Americans with mortgages that are already in default.
  
  
• Bear Market Update: since closing with record highs on October 9, 2007, the DJIA has now lost 5,667.22 points (40.01%), while the broader S&P 500 Index has declined by 691.86 points (44.204%). The record high for the DJIA is 14,164.53; for the S&P 500 Index it's 1,565.15.
  

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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 FOMC will vote to cut the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the December 16^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 December 16^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.

>  SITEMAP  <

Futures Market Still 100% Certain The Fed Will Cut Short-Term Rates On December 16

The fed funds futures market ended the week 95% certain that the Fed will cut short-term rates by 50 basis points (0.50 percentage point) at the next Federal Open Market Committee (FOMC) meeting on December 16. The futures market isn't accustomed to dealing with a fed funds target rate that's very likely to go lower than the current 1.00%, so the 50 basis point cut that futures contracts are implying right now shouldn't be taken as foolproof. We can, however, be confident that the Fed will elect to cut rates by at least 25 basis points next month.

Factors that (likely) influenced the fed funds futures market this week:

• On Monday, the Institute for Supply Management reported that its Purchasing Manager's Index (PMI) declined for the fourth straight month, from 43.5% for September to 38.9% for October. The last time the PMI was at similar lows was way back in 1982.
  
  For the PMI, any figure above 50% suggests that, in general, the American manufacturing sector is expanding, while any figure below 50% suggests contraction for a particular month.
  
  
• Also on Monday, the Commerce Department reported that construction spending fell by 0.3% during September, and by 6.6% year-over-year.
  
  
• On Tuesday, the U.S. Census Bureau reported that factory orders declined by 2.5% during September. Wall Street economists were expecting a decline of 0.7%.
  
  
• Earlier today, the Labor Department reported that between the beginning of September and the end of October, the already frail U.S. economy shed another 524,000 jobs, and the unemployment rate jumped to 6.5%.
  
  
• On Thursday, the Bank of England (BOE) cut its benchmark interest rate by a staggering 150 basis points (1.50% percentage points) from 4.5% to 3.0%. The BOE, which is England's central bank, hasn't cut its key interest rate that aggressively since 1981.
  
  Also on Thursday, the European Central Bank (ECB) cut its benchmark rate by 50 basis points to 3.25%.
  
  
• Crude oil for future delivery ended the week at $61.04 per barrel in New York, an exact match with the closing price on December 30, 2005. That's a decline of $84.25 (57.987%) since crude closed at $145.29 per barrel on July 4, 2008.
  
  
• The effective fed funds rate, which is the actual rate (average) at which American commercial banks have been making overnight loans to each other via the Fed, was 0.37% today and was 0.24% last Friday, according to the Wall Street Journal. The target fed funds rate is currently 1.00%.
  
  
• Bear Market Update: since closing with record highs on October 9, 2007, the DJIA has now lost 5,220.72 points (36.858%), while the broader S&P 500 Index has declined by 634.16 points (40.518%). The record high for the DJIA is 14,164.53; for the S&P 500 Index it's 1,565.15.

--

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 FOMC will vote to cut the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the December 16^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 December 16^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.

>  SITEMAP  <