Key economic data released over the last fortnight remained rather mixed. On an upbeat note, advanced estimates of US retail sales for January beat consensus estimates to increase by 0.3% MoM (-0.4% in December). Headline sales were primarily driven by elevated levels of gasoline prices and high demand for motor vehicles. Ex-auto growth was also positive, as sales climbed 0.3% MoM (-0.3% decline previously). Building upon the retail sales surprise, weekly jobless claims data showed a drop in claims of 9K to 348K in the week ending Feb 9. With soaring exports partially offsetting a big jump in oil imports, the US trade deficit declined to USD 711.6 bn in 2007 after widening successively for five straight years. On the downside, US ISM Non Manufacturing index for January plummeted to 41.9 (54.4 in December), its largest monthly decline on record and much larger than the market expectations of a drop to 53. Components of the index were as bad if not worse. While new orders contracted for the first time since October 2001, employment contracted for the first time since February 2002. The New York Federal Reserve reported that its general business conditions index tumbled to -11.72 in Feb (9.03 in January), falling below zero for the first time since 2005.
Meanwhile, dislocations in the financial markets intensified as mounting losses and the threat of credit-rating downgrades roiled the bond insurance industry. While raising concerns about the ‘uncertain’ financial outlook G7 officials estimated potential subprime losses estimated to touch USD 400 bn. With regulators nervous about lax lending standards, the wave of risk aversion is spreading across the spectrum of US banking industry with small lenders beginning to feel the squeeze of credit crunch. The Federal Reserve’s survey of senior bank loan officer’s survey for January offered the hardest evidence that the credit crunch may be spreading beyond real estate loans. The survey found that about 55% of banks have tightened liquidity standards for mortgages while 60% have done so on home equity lines. The survey showed a marginal tightening in credit card lending standards (32.1% from 26% previously).
Federal Reserve Chairman Ben Bernanke, in his testimony to the Senate Banking Committee assured the house that the FOMC would "act in a timely manner as needed to support growth and to provide adequate insurance against downside risks". Raising concerns about the adverse impact of tight lending standards on economic growth, Bernanke noted that more-expensive and less-available credit seems likely to continue to be a source of restraint on economic growth. Bernanke once again admitted that the outlook for the economy has worsened in recent months. He said that the economy is expected to see a "period of sluggish growth" followed by a "somewhat stronger" pace starting later this year as the effects of the monetary and fiscal policy start to be felt. In a positive move, US President Mr. Bush has signed the USD 168 bn fiscal stimulus package, approved by the Senate, thereby complementing the Fed’s endeavor to stave off a recession. Bernanke’s testimony has further cemented my view of an aggresive ( biased towards a 50 bps) rate cut at the next FOMC meeting while continued liquidity injections would continue to keep conditions in the money market stable. At this juncture, with the next FOMC meeting still a month away, the Fed’s rate decision hinges on two important factors, the nature of key economic data points released till March 18th and developments in the financial markets. Going forward, its would be interesting to take a close look at the minutes of the January 29th FOMC meeting as well as US CPI and housing starts released this week for further cues on the Fed’s next move.
Meanwhile, dislocations in the financial markets intensified as mounting losses and the threat of credit-rating downgrades roiled the bond insurance industry. While raising concerns about the ‘uncertain’ financial outlook G7 officials estimated potential subprime losses estimated to touch USD 400 bn. With regulators nervous about lax lending standards, the wave of risk aversion is spreading across the spectrum of US banking industry with small lenders beginning to feel the squeeze of credit crunch. The Federal Reserve’s survey of senior bank loan officer’s survey for January offered the hardest evidence that the credit crunch may be spreading beyond real estate loans. The survey found that about 55% of banks have tightened liquidity standards for mortgages while 60% have done so on home equity lines. The survey showed a marginal tightening in credit card lending standards (32.1% from 26% previously).
Federal Reserve Chairman Ben Bernanke, in his testimony to the Senate Banking Committee assured the house that the FOMC would "act in a timely manner as needed to support growth and to provide adequate insurance against downside risks". Raising concerns about the adverse impact of tight lending standards on economic growth, Bernanke noted that more-expensive and less-available credit seems likely to continue to be a source of restraint on economic growth. Bernanke once again admitted that the outlook for the economy has worsened in recent months. He said that the economy is expected to see a "period of sluggish growth" followed by a "somewhat stronger" pace starting later this year as the effects of the monetary and fiscal policy start to be felt. In a positive move, US President Mr. Bush has signed the USD 168 bn fiscal stimulus package, approved by the Senate, thereby complementing the Fed’s endeavor to stave off a recession. Bernanke’s testimony has further cemented my view of an aggresive ( biased towards a 50 bps) rate cut at the next FOMC meeting while continued liquidity injections would continue to keep conditions in the money market stable. At this juncture, with the next FOMC meeting still a month away, the Fed’s rate decision hinges on two important factors, the nature of key economic data points released till March 18th and developments in the financial markets. Going forward, its would be interesting to take a close look at the minutes of the January 29th FOMC meeting as well as US CPI and housing starts released this week for further cues on the Fed’s next move.
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