The Federal Open Market Committee’s policy stance is clearly in a state of change. Credit conditions have improved, growth has maintained its positive tack and inflation has stepped back into the forefront; and yet, the market’s benchmark for interest rate speculation (Fed Funds futures) has actually reduced its hawkish reading over the past week. This sense of caution is warranted considering demand for and risk in lending is still near recent historical highs.
[I]Be sure to join DailyFX Analysts in discussing the Watch What the Fed Watches latest report in the [/I][I]DailyFX Forex Forum[/I]
[B]CREDIT MARKET: HOW IS IT DOING? [/B]
The Federal Open Market Committee’s policy stance is clearly in a state of change. Credit conditions have improved, growth has maintained its positive tack and inflation has stepped back into the forefront; and yet, the market’s benchmark for interest rate speculation (Fed Funds futures) has actually reduced its hawkish reading over the past week. This sense of caution is warranted considering demand for and risk in lending is still near recent historical highs. What’s more, the latest comments from Fed Chairman Ben Bernanke, while highlighting the balance of inflation and growth risks, came with a warning for weak second quarter growth. If the world’s largest economy sinks into the beginning stages of a recession, the eventual recovery in the credit market will no doubt be deferred as banks further limit lending on the prospect of greater defaults.
[B]A DEEPER LOOK INTO THE CHANGES THIS WEEK:[/B]
The fear premium in debt instruments continued to rise this past week. Credit default swap rates rose 3.4 percent to once again overtake the 100 basis point mark as rising interest rates are boosting the default risk for loans at the consumer level all the way up to major financial institutions. In the past few days, new homeowners were confronted with the highest average rate for a 30-year FRM in 11-weeks. Elsewhere, Standard & Poor’s issued a report revealing firms were holding the least cash to cover their debt obligations on record.
[B]
FINANCIAL MARKETS: HOW ARE THEY DOING?[/B]
[B]A DEEPER LOOK INTO THE CHANGES THIS WEEK:[/B]
Suggesting the past few weeks of selling pressure is legitimate, the market-wide downturn in asset prices has come hand-in-hand with a jump in hedging and rebound in volatility. The put-call ratio jumped from a five month low after Bernanke’s comments led investors to buy protection for a potential, long-term bear market. At the same time, volatility noted a recovery that pushed the S&P Volatility Index back above 20 percent for the first time in a month. A genuine pick up in volatility would no doubt lead to another round of liquidating risky equities.
[B]
U.S. CONSUMER: HOW ARE THEY DOING?[/B]
<strong style="">
[B]A DEEPER LOOK INTO THE CHANGES THIS WEEK:[/B]
While the leading economic indicators have retained a bleak outlook, the more closely followed lagging figures are still padding hope for a recovery in growth trends through the year’s end. This past week, the ISM’s manufacturing and service sector surveys offered a mixed view on the health of the economy. Factory activity was culled by record input costs and floundering demand, which in turn led activity to contract for a fourth consecutive month. In direct contrast, however, the much larger service sector actually expanded on orders and activity; yet a drop in employment certainly raises concern.