Vital Signs: Investors Want More Cuts from the Fed

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CONSUMER CONFIDENCE INDEX

Tuesday, Jan. 29, 10 a.m. EST

Consumer confidence probably eroded after a surprise uptick in December. The unexpected rise in the final month of 2007 may have been linked to gasoline prices, which eased a little after climbing in November.

However, there was a troubling decline in the current conditions reading, which dropped to 108.3, from 115.7 in November, and 118 in October. The expectations index actually posted a decent gain to 75.5, from a 57-month low of 69.1. The perception that jobs are hard to get hit a two-year high, while the share of respondents that believed business conditions are bad hit a four-year high. Yet there was a less pessimism about business conditions and employment six months from now.

After the slew of poor economic and financial data that have come out since the December survey, these views may weaken along with the headline result.

MEETINGS OF NOTE

Wednesday, Jan. 30, Midnight EST - Former Federal Reserve Board Chairman Alan Greenspan gives a speech entitled “Shifting Paradigms in a Global Economy” at an investment forum in Moscow.

9 a.m. EST - The Federal Reserve’s Federal Open Market Committee will discuss monetary policy over its two-day meeting. An announcement by the Fed will come around 2:15 p.m. There is a widespread view among economists and investors that the central bank will cut its target fed funds even further.

On Jan. 22, the Fed made a surprise inter-meeting move, cutting interest rates by 75 basis points to 3.5%. The accompanying press release stated the move came “in view of a weakening of the economic outlook and increasing downside risks to growth.” In particular, Chairman Ben Bernanke and other FOMC members are concerned about the ongoing contraction in housing and evidence of a weakening labor market. In December, the unemployment rate jumped to 5%, from 4.7%.

Right now, options trading in federal funds futures, which can offer a reading on what the market expects the Fed’s rate will be, implies a 100% likelihood that policymakers will cut rates at the Jan. 29-30 meeting. The key question now is how big the rate cut will be. Right now, most investors believe it will be 50 basis points, bringing the fed funds rate down to 3%.

MORTGAGE APPLICATIONS - Wednesday, Jan. 30, 7 a.m. EST

The Mortgage Bankers Association releases its mortgage Weekly Mortgage Applications Survey of home buying and refinancing application activity for the week ending Jan. 18. Falling interest rates are sparking a surge in refi applications.

The interest rate for 30-year fixed-rate mortgages fell to a two-year low of 5.49% from 5.62% the week before.

The seasonally adjusted purchase index eased 4.6% to 439.9 from 461.2 in the week ended Jan. 11. Refinancing activity climbed 16.9% to 4178.2 from 3575.5.

The latest four-week moving averages moved up for both purchase and refi applications. The average for the purchase index was 419 from 407.6. The refi index soared to 2967.2 from 2401.5 in the week ended Jan. 11.

ADP NATIONAL EMPLOYMENT REPORT - Wednesday, Jan. 30, 8:15 a.m. EST

The ADP National Employment Report is a measure of nonfarm private employment using anonymous payroll data of close to 400,000 businesses. The monthly figures are prepared by Macroeconomic Advisers, an economic consulting firm. The report is used by economists to get a sense of how the labor markets are doing before the Bureau of Labor Statistics’ employment report.

The ADP numbers for December were soft, with private employment reported to have increased by 40,000 workers. It was the smallest monthly gain since June of 2003. The November tally was revised down to a gain of 173,000 jobs, from the originally reported 189,000. And the six-month average cooled off to 77,000 new jobs per month, from 143,000 in January of 2007. Based on the BLS figures, the six-month average rise in private service-sector payrolls is 110,000, from 166,000 in January.

GROSS DOMESTIC PRODUCT - Wednesday, Jan. 30, 8:30 a.m. EST

Economic growth cooled off sharply in the fourth quarter. The consensus is that real gross domestic product grew at an annual pace of 1.2%, compared to 4.9% in the third quarter and 3.8% in the second quarter.

The ongoing housing recession should once again be a big drag. But spreading caution in corporate boardrooms means growth in capital spending probably cooled off a bit and inventories did not grow much. Consumer spending is not expected to match the solid 2.8% annual rate of growth in the third quarter, although it won’t be as bad as feared back in November when there were serious concerns about the holiday shopping season.