Futures Market Certain of A 50 Basis Point Cut On or Before March 18

Recession fears intensified Tuesday after investors had a chance to digest the numbers from the Institute for Supply Management's Business Activity Index. The index nosedived last month, from 54.4% for December to 41.9% for January. The scale of the decline was punctuated by the fact that any figure below 50% suggests that non-manufacturing sectors of the U.S. economy are contracting.

The Business Activity Index has been shrinking since the summer of last year, but only recently declined precipitously:

• August 2007: 56.3%
• September 2007: 55.7%
• October 2007: 55.5%
• November 2007: 54.6%
• December 2007: 54.4%
• January 2008: 41.9%
  
  

Here's a clip from the January report:

"...The industries reporting growth of business activity in January are: Utilities and Educational Services. The industries reporting decreased business activity in January are: Arts, Entertainment & Recreation; Agriculture, Forestry, Fishing & Hunting; Accommodation & Food Services; Health Care & Social Assistance; Transportation & Warehousing; Real Estate, Rental & Leasing; Management of Companies and Support Services; Construction; Wholesale Trade; Finance & Insurance; Information; Retail Trade; Public Administration; and Professional, Scientific & Technical Services..."

As of this evening, the fed funds futures market has odds at 80% that the Fed will cut the benchmark Fed Funds Target Rate by 50 basis points (0.50 percentage point) at or before the March 18 Federal Open Market Committee (FOMC) monetary policy meeting. A 20% minority in the futures market are betting that the Fed will cut short-term rates by 75 basis points between now and March 18.


Summary of The Latest Odds

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 lower the benchmark Federal Funds Target Rate by at least 50 basis points (0.50 percentage point) at or before the March 18^TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

• Current odds that the Prime Rate will be cut by at least 50 basis points at or before the March 18^TH 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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U.S. Prime Rate Is Now 6.00%

The Federal Open Market Committee (FOMC) of the Federal Reserve has just adjourned its first, regularly scheduled monetary policy meeting of 2008, and, in accordance with the latest forecast, the FOMC has just lowered its target for the Federal Funds Rate by 50 basis points (0.50 percentage point) to 3.00%. Therefore, as of today, the U.S. Prime Rate is now 6.00%. Many American banks have already issued a press release announcing that their prime lending rate has been lowered from 6.50% to 6.00%.

Here's a clip from a press release issued by the FOMC earlier today:

"The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 3 percent.

Financial markets remain under considerable stress, and credit has tightened further for some businesses and households. Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

Today’s policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred no change in the target for the federal funds rate at this meeting.

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 3-1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Atlanta, Chicago, St. Louis, Kansas City, and San Francisco."

Summary of The Latest Odds

As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 67% (as implied by current pricing on contracts) that the FOMC will vote to lower the benchmark Federal Funds Target Rate by 25 basis points (0.25 percentage point) at the March 18^TH, 2008 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

• Current odds that the Prime Rate will be cut by 25 basis points at the March 18^TH FOMC monetary policy meeting: 67% (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.

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Fed Decision Imminent: Odds On A 50 Basis Point Cut at 74%

The economy grew by 0.6% during the fourth quarter of 2007, according to the "advance" estimate released by the Commerce Department this morning. Wall Street economists were expecting around 1.2%. 0.6% growth is certainly slow enough for the Fed to cut aggressively, as expected. The odds that the Fed will cut short-term rates by 50 basis points (0.50 percentage point) are currently at 74%, while odds on a 25 basis point cut are at 26%.

The decision on interest rates will be released in less than one hour. Stay tuned.


Summary of The Latest Odds

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 lower the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) today.


Summary of the Latest Prime Rate Forecast:

• Current odds that the Prime Rate will be cut by at least 25 basis points today: 100% (certain)
  
  
• Current odds that the Prime Rate will be cut by 50 basis points today: 74% (more likely than unlikely)
  
  
• NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)
  

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Odds on The Fed Cutting by 50 Basis Points Tomorrow at 76% Despite Encouraging Report on Orders for Durable Goods

Some positive news from the economic front today: the Commerce Department reported that new orders for durable, manufactured goods -- products built to last 3 years or more, like DVD players, war planes and cooking ranges -- rose by $11.2 billion (5.2%) during December 2007. Wall Street economists were expecting an increase of about 1.6%. Despite this positive economic news, the fed funds futures market is still 76% certain that the Fed will opt for a 50 basis point (0.50 percentage point) cut for short-term rates tomorrow. The odds on a 25 basis point cut are currently at 24%.

On the negative side, earlier today the Conference Board reported that the Consumer Confidence Index (CCI) fell from last month's 90.6 to 87.9 for this month; discouraging news from a consumer spending perspective. Here are the CCI figures since the summer of last year:

• July 2007: 111.9
  
• August 2007: 105.6
  
• September 2007: 99.5
  
• October 2007: 95.2
  
• November 2007: 87.8
  
• December 2007: 90.6
  
• January 2008: 87.9 (preliminary)
  

For the CCI, the baseline score of 100 is pegged to 1985 survey results.

Summary of The Latest Odds

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 lower the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at tomorrow's 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 tomorrow's FOMC monetary policy meeting: 100% (certain)
  
  
• Current odds that the Prime Rate will be cut by 50 basis points at tomorrow's FOMC monetary policy meeting: 76% (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.

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Odds On A 50 Basis Point Cut for January 30 Now at 78%

The Fed will make its next decision on short-term interest rates on January 30, and as we approach that date, the odds from the fed funds futures market have, with increasing confidence, been predicting that the Fed will opt for a 50 basis point (0.50 percentage point) cut. The odds on a 50 basis point cut for the benchmark Fed Funds Target Rate now stand at 78%, and the remaining odds -- 22% -- are for a 25 basis point cut.

Let's have a quick look at what might have influenced the futures market recently.

Though both the Dow Jones Industrial Average (DJIA) and the S&P 500 Index advanced on the week, both indexes are still down significantly since each peaked last fall. Since closing with all-time highs on October 9, 2007, the DJIA is now down 1,957.36 points (13.819%), while the S&P 500 is down 234.54 points (14.985%).

The yield on the benchmark 10-Year Treasury Note fell to 3.584%. For some perspective, the yield was 4.65% on October 9, 2007.

Also notable: New York Spot Gold closed at $910.50 per ounce on Friday.


Summary of The Latest Odds

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 lower the benchmark Federal Funds Target Rate by at least 25 basis points (0.25 percentage point) at the January 30^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 January 30^TH FOMC monetary policy meeting: 100% (certain)
  
  
• Current odds that the Prime Rate will be cut by 50 basis points at the January 30^TH FOMC monetary policy meeting: 78% (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.

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