mfm jun 17 2011
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mfglobal.com
No Growth Rebound Yet; Core Inflation UpWe continue to expect growth to show renewed upward momentum soon, helped by a fading or
reversal of some of the factors that have contributed to weakness recently. That said, a
turnaround is not evident yet. Against that backdrop, we expect a clear on hold signal from Fed
officials in the statement released after the upcoming FOMC meeting as well as the chairmans
post-meeting press briefing. The disappointing data recently will likely be noted, but we doubt
officials are ready to extrapolate much of the weakness yet. In the other direction, underlying
(i.e., core) inflation has accelerated recently, even if it is still subdued. Indeed, following the
latest CPI report, we raised slightly our 2011 forecast for core and total inflation. We now expect
the core CPI to rise 1.8% this year (Q4/Q4), instead of 1.6%.Taylor Rule Suggests Fed Tightening if Officials Unemployment and Inflation
Projections Stay on TrackWeaker than expected growth, combined with Eurozone debt turmoil and, perhaps, increased
expectations for some fiscal tightening have led to significantly reduced market expectations for
Fed tightening. Fed funds futures contracts now appear to be pricing in only about a 0.5% funds
rate at the end of 2012. We realize Fed officials do not mechanically follow a Taylor Rule in
setting monetary policy, and expectations for growth are being pared a little, but, based on the
original Taylor Rule and adjusting for stimulus from balance sheet expansion, we calculate that
the last set of Fed projections was consistent with about a 3% funds rate at the end of 2012.
Preview: Home Sales Down, Durables and GDP UpAlong with the Fed meeting and the usual weekly data, highlights will include new and existing
home sales (we expect declines in both series), home prices (we forecast stabilization), durablegoods orders (up solidly), and revised Q1 GDP growth (we expect a 0.5-point upward revision).
Based on the original Taylor Rule, and adjusting for stimulus from balance sheet expansion,
we estimate the last set of central tendency projections from Fed officials would prescribe
about a 3% funds rate at the end of 2012, and 3 3/4% at the end of 2013.
*, **, *** See chart on page 6 for notes. Shaded bars represent periods of recession.Source: Federal Reserve, Bureau of Economic Analysis, Bureau of Labor Statistics, Congressional Budget Office (CBO),and MF Global
Economic Analysis | US
JAMES F. OSULLIVAN STEPHANIE S. CHENG
Chief Economist Economist
+1 212 589 6479 +1 212 589 6373
josullivan@mfglobal.com scheng@mfglobal.com
CONTENTS
Pg. 2 | No Growth Rebound Yet;Core Inflation Up
Pg. 6 | Taylor Rule Suggests FedTightening if OfficialsUnemployment and InflationProjections Stay on Track
Pg. 8 | Forecast Summary
Pg. 9 | Data Preview
Pg. 13 | Calendar
JUNE 17, 2011 INSTITUTIONAL USE ONLY MF Global Weekly Report
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2011-13est withFedCTPs*
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NO GROWTH REBOUND YET; CORE INFLATION UP
We continue to expect growth to show renewed upward
momentum in the next few months, helped by a fading or reversal
of some of the factors that have contributed to greater-than-
expected weakness recentlyincluding the Q1 spike in oil prices,
Japan-related supply-chain disruptions, and extreme weather.That said, a turnaround is not evident yet. While this past weeks
jobless claims reading was encouraging (with a drop to 414,000
from 430,000), regional manufacturing surveys were weak (with
the headline New York and Philadelphia Fed indexes dropping
below zero). The ongoing Eurozone debt crisis is not helping
either, potentially undermining business and consumer
confidence through its impact on the equity market.
Against that backdrop, we expect a clear on hold signal from
Fed officials in the statement released after the upcoming FOMC
meeting as well as the chairmans post-meeting press briefing
with no imminent change in either the funds rate or the size of the
balance sheet once the $600 billion asset purchase program is
completed this month.
The disappointing data recently will likely be noted in the
statement, but we doubt officials are ready to extrapolate much of
the weakness yet. We expect only a modest lowering of officials
growth projections. In the other direction, officials will likely also
have to acknowledge that underlying (i.e., core) inflation has
accelerated recently, even if it is still subdued. Indeed, following
the latest CPI report we have raised slightly our forecast for core
and total inflation this year (details below).
No More Fed EasingThe weakening in the growth data has inevitably led to
speculation about another round of Fed asset purchases, or
QE3 in the terminology of most people outside of the Fed.
If our forecast for the economy is right, QE3 will clearly not
happen; instead, we expect the Fed to just stay on hold in coming
months (including a freeze on the size of the balance sheet) and
then start unwinding some of its accommodation in 2012.
But what if growth continues to disappoint? We believe QE3 is
highly unlikely. We are not saying there is no chance; ultimately,
Fed officials will do whatever it takes. However, in our view, the
data would need to show much more decisive weakening, on a
sustained basis, and not just for growth; the inflation and inflationexpectations measures will also be very important.
As of now at least, the unemployment rate is lower, the latest
trend in core inflation is higher, and inflation expectations
measures, particularly the TIPS five-year, five-year forward
measure, are higher than they were when officials started to
signal round two of asset purchases a year ago. Plus, the
criticism the Fed received last time would likely make officials
Some, but not all, of the recent spike in claims has been
reversed. Claims fell to 414,000 from 430,000 in the latest report
Source: Department of Labor and MF Global
The current activity indexes in both the New York and the
Philadelphia Fed manufacturing surveys fell below zero in June.
While very weak, the data can change direction quickly. Both
indexes fell below zero in 2010, albeit not at the same time.
Note: Shaded bars represent periods of recession.Source: Federal Reserve Banks of New York and Philadelphia
Business confidence fell only modestly in Q2 according to the
latest Business Roundtable survey.
Source: Business Roundtable and The University of Michigan
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Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11
4-week average Weekly
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index, monthlyindex,quarterly
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less quick to respond this time. In short, never say never, but QE3
is highly, highly unlikely unless the recovery is much weaker than
just disappointing; it has to be faltering, and inflation and inflation
expectations measures would need to start moving down again.
That has certainly not happened yet.
Clear Pickup in Core Inflation
The 0.3% m/m rise in the core CPI in May boosted the 2011-to-
date increase (May vs. December) to 2.4% at an annual rate from
2.1% through April. The core CPI rose just 0.8% in 2010
(December to December). Moreover, the pickup has been fairly
broad-based (see table).
The Feds preferred core PCE price index measure likely rose
less than the core CPI in Maywe estimate a 0.2% m/m rise
but it also shows a clear pickup this year. Our 0.2% m/m estimate
for May implies a 2011-to-date pace of 2.0% at an annual rate, up
from a 0.8% gain in 2010 (December to December).
Such short-term calculations can be volatile, and we do not
believe the trend in core inflation is quite back to the roughly 2%
pace considered ideal by most Fed officials. On a y/y basis, we
estimate the core PCE measure was up 1.1% y/y in May,
following 1.0% in April. The core CPI was up 1.5% y/y in May.
Still, the turnaround since last fall, when Fed officials were
increasingly worried about deflation risks, has been striking.
We now expect the y/y pace in the core CPI to be up to 1.8% in
Q4 of 2011, instead of 1.6%, with the pace in the core PCE index
up to 1.5%, instead of 1.3%. Even those new estimates assume a
significant slowing relative to the first five months of the year. Forthe total CPI, we now forecast 2.8% y/y in Q4 of this year, instead
of 2.4%. (The total CPI was 3.6% y/y in May.)
The recent weakening in commodity prices will likely contribute to
some slowing in core consumer prices in coming months, to the
extent the recent acceleration in core prices may have reflected
some pass-through effects. Both new and used vehicles prices
are also likely to slow, with the sharp pickup recently probably
exaggerated by inventory shortages related to Japan supply-
chain effects. Conversely, the trend in import prices suggests
further acceleration in the apparel component (see top right chart
on following page), while rents are likely to continue accelerating
if the labor market continues to improve, as we expect. The rateof growth in employment is a key driver of rental demand, and
payrolls show a clear pickup this year, even with the weaker-than-
expected May data. (Gains have averaged 157,000 per month, up
from 78,000 in 2010.)
The overall CPI was up 3.6% y/y in May, a pickup from 1.5% y/y
in December. It has risen at a 5.1% annual rate so far this year
(May vs. December). The recent decline in oil prices is likely to
lead to a reversal of some of that pickup in coming months.
The core CPI has also accelerated this year, to 1.5% y/y in May
from 0.8% y/y in December.
Source: Bureau of Labor Statistics
The core CPI shows a 2.4% annual rate so far this year (May vs.
December), up from 0.8% in 2010 (December to December).The
pickup has been fairly broad-based, although two categories have
been especially important contributors: shelter (mainly rents) and
vehicles.
% ch, annual rate,unless noted
2010* 2011THRUMAY**
ACCEL/
DECEL.(2011 vs.2010,
pct pcts)
CONTRIBUT
TOACCEL/DECE
pct pts.)
CORE CPI 0.8 2.4 1.6 1.
SHELTER (41.6%) 0.4 1.3 0.9 0.
RESIDL RENT (7.7%) 0.8 1.5 0.7 0.
OER (32.4%) 0.3 1.1 0.9 0.
LODGING (1.0%) 2.5 6.3 3.8 0.
FURNISH/OPS (5.9%) -2.5 1.1 3.6 0.
APPAREL (4.8%) -1.1 2.3 3.4 0.
NEW VEHICLES (5.6%) -0.2 8.4 8.6 0.
USED VEHICLES (2.6%) 3.7 7.2 3.5 0.
AIRFARES (1.0%) 5.8 13.1 7.3 0.
MEDICAL CARE (8.4%) 3.3 3.2 -0.1 0.
RECREATION (8.3%) -0.8 1.7 2.4 0.
EDUC, COMMUN (8.3%) 1.3 1.6 0.3 0.
OTHER (4.5%) 1.9 0.2 -1.7 -0.
*December 2010 vs. December 2009 (nsa)**May 2011 vs. December 2010 (sa)Source: Bureau of Labor Statistics and MF Global
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Total CPI Core CPI
%y/y, nsa
May
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Claims Still Show Net Risebut Not Cumulating Weakness
As noted, the latest jobless claims data were encouraging, with
the weekly reading down to 414,000 from 430,000. At 425,000,
the four-week average is still up about 30,000 from the trend in
March, although the four-week average was as high as 440,000 a
month ago (see top chart on page 2). In short, the data are not
showing cumulating weakness in the overall economy, which
cautions against extrapolating the sharp dropoff in the current
activity indexes in the New York and Philadelphia Fed
manufacturing surveys. Those regional indexes can change
direction quickly, and both turned negative briefly in 2010 (albeit
not in the same monthsee middle chart on page 2).
Labor cost data do not suggest a continuation of the recent sharp
uptrend in core inflation, although gains have stopped slowing
recently, even with unemployment at a high level. The pattern is
likely due in part at least to the upward pull from well-anchored
inflation expectations. Another factor could be nominal rigidities,with widespread aversion to outright cuts.
*Through May. **Series starts in 2006. Source: Bureau of Labor Statistics
Despite the surge in apparel import prices, the pickup in overall
consumer goods import prices has been fairly modest thus far.
Source: Federal Reserve Board and Bureau of Labor Statistics
The modest drop in the Business Roundtables CEO confidence
index in Q2 was also encouraging: after rising from 101.0 in Q4 to
113.0 in Q1, the index fell to 109.9 in Q2 (see bottom chart on
page 2). Indeed, the Q2 reading was the second highest on
record (second only to Q1), with history starting in 2002. Businesconfidence is likely to be a more important determinant of the
trend in growth in coming months than consumer confidence, with
consumer confidence ultimately driven by the extent to which
hiring picks up.
A pickup in apparel prices in the CPI looks consistent with the
pattern in import prices. Indeed, apparel import prices are
signaling further acceleration.
Source: Bureau of Labor Statistics
Weakening in TV import prices has offset part of the impact of the
surge in apparel import prices on overall consumer goods import
prices, although the data have not shown much correlation with
TV prices in the CPI.
Source:Bureau of Labor Statistics
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Import p rices: apparel & accessories, manufactured goods
% y/y, nsa
May
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ECI: wages and salariesECI: totalAverage h ourly earnings (all private sector employees)**
%y/y
Q1
Q1Q2*
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Non auto consumer goods import price (l)Core go ods CPI (l)Real broad dollar index (r)
%y/y %y/y, inverted
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CPI: televis ion sets
Import pr ices: television and video receivers
% y/y, nsa
May
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FOMC Statement Likely to Once Again Signal No Rush to Tighten
The April 27 FOMC statement (below) was very similar to the March 15 version, consistent with no new message on policy. While the
easing cycle was expected to end at mid-year, when the $600 billion purchase program is completed, officials still appeared in no rush
to tighten. Moreover, in his post-meeting press briefing the chairman clearly signaled the intention to continue reinvesting maturing
securities when the $600 billion program is completed at mid-yearat least initially. Such forward guidance on reinvesting was not
included in the FOMC statement. Mr. Bernanke made clear that a likely small first step in the tightening process would be when the Fe
stops reinvesting maturing securities, but even that step would depend on the outlook.
FOMC StatementsApril 27, 2011 versus March 15, 2011 (New wording is highlighted in bold)
Information received since the Federal Open Market Committee met in March January indicates suggests that the economicrecovery is proceeding at a moderate pace on a firmer footing, and overall conditions in the labor market are appear to beimproving gradually. Household spending and business investment in equipment and software continue to expand. However,investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Commodity prices haverisen significantly since last the summer, and concerns about global supplies of crude oil have contributed to a further increasesharp run-up in oil prices since the Committee met in March in recent weeks. Inflation has picked up in recent months, but
Nonetheless, longer-term inflation expectations have remained stable, and measures of underlying inflation are still have beensubdued.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, Ttheunemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels thatthe Committee judges to be consistent, over the longer run, with its dual mandate. The recent Iincreases in the prices of energyand other commodities have pushed up inflation in recent months are currently putting upward pressure on inflation. TheCommittee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflationexpectations. The Committee continues to anticipate a gradual return to higher levels of resource utilization in a context of pricestability.
To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with itsmandate, the Committee decided today to continue expanding its holdings of securities as announced in November. In
particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and willcomplete intends to purchases of $600 billion of longer-term Treasury securities by the end of the current second quarter of2011. The Committee will regularly review the size and composition pace of its securities holdings purchases and the overallsize of the asset-purchase program in light of incoming information and is prepared to will adjust those holdings the programas needed to best foster maximum employment and price stability.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate thateconomic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, arelikely to warrant exceptionally low levels for the federal funds rate for an extended period.
The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools asnecessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A.Duke; Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo;and Janet L. Yellen.
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TAYLOR RULE SUGGESTS FED TIGHTENING IF OFFICIALS
UNEMPLOYMENT AND INFLATION PROJECTIONS STAY ON
TRACK
Weaker than expected growth data, combined with Eurozone
debt turmoil and, perhaps, increased expectations for some fiscal
tightening have led to significantly reduced expectations in
financial markets for Fed tightening. Fed funds futures contracts
appear to be pricing in only about a 0.5% funds rate at the end of
2012, down from around 1.5% two months ago. And, certainly, we
would not expect tightening if the growth data continue to
disappoint and the unemployment rate remains over 9% on a
sustained basis. However, we expect the growth data to improve
enough to keep the unemployment rate trending lower. (The 9.1%
level in May was down from 9.6% in Q4, even with increases in
April and May.) Meanwhile, as discussed on page 3, the
underlying trend in inflation has moved up over the past year.
While tightening is clearly not imminent, it is almost inevitable
eventually if the unemployment rate continues to decline and the
trend in inflation is edging up. The only questions are when? and
how fast?
We realize Fed officials do not mechanically follow a Taylor Rule
in setting monetary policy. Indeed, there is no single Taylor Rule,
with many analysts empirically deriving Taylor Rules based on
how the Fed has acted in the past. However, the Fed chairman is
on record defending policy based on the original Taylor Rule, and,
based on that version, and adjusting for stimulus from balance
sheet expansion (an additional complication), we estimate the last
set of central tendency projections from Fed officials would
prescribe about a 3% funds rate at the end of 2012. That 3%calculation reflects a 1% figure without adjusting for the stimulus
from balance sheet expansion and the equivalent of two points of
stimulus from the enlarged balance sheet (allowing for a $300
billion decline in total Fed assets next year). While we are not
suggesting that the results be taken literally, and the estimates
will likely change a little after Fed officials update their central
tendency projections at the upcoming meeting, the calculations
support our view that financial markets are pricing in too little
tightening in 2012.
Here are the details behind our calculations:
The original Taylor Rule, based on the GDP output gap (the %deviation between actual and potential GDP) and inflation,
calculates the appropriate level of the federal funds (FF) rate as
follows:
FF rate (%) = 2 + Inflation + 0.5 (Inflation 2) 0.5 Output gap
Based on the original Taylor Rule, and adjusting for stimulus from
balance sheet expansion, we estimate the latest set of central
tendency projections from Fed officials would prescribe about a
3% funds rate at the end of 2012 (see text for details). We are
not suggesting that the results be taken literally, and the
estimates will likely change a little after Fed officials update their
central tendency projections at the upcoming meeting, but the
calculations provide reason to believe short-term fixed income
markets will need to adjust significantly if the recent weakening in
the growth data is not sustained. Fed funds futures contracts now
appear to be pricing in only about a 0.5% funds rate at the end of
2012.
* Using latest set of Fed officials' central tendency projections (CTPs)**Modified original Taylor Rule, using unemployment rate (UE) gap (differencebetween unemployment rate and estimated full-employment unemployment rate)instead of output gap and assuming a 0.5-point change in the unemployment rate
for every 1.0 point change in the output gap. Specifically: Fed funds = 2.0 + CorePCE inflation + 0.5 x (Core PCE inflation - 2.0) - 0.5 x UE gap. For estimated full-employment unemployment rate we use Congressional Budget Office historicalestimates through 2010 and Fed officials' latest "longer-run" projection for 2011-13.*** Modified original Taylor Rule using unemployment rate gap (** above), adjustedfor stimulus from balance sheet expansion, assuming every $200 billi on of balancesheet expansion is equivalent to an additional 25 bps of easing through the fundsrate. Projections assume a $2.875 trillion balance sheet at end-2011, $2.575 trillionat end-2012, and $2.275 trillion at end-2013..Source: Federal Reserve, Bureau of Economic Analysis, Bureau of Labor Statistics,Congressional Budget Office (CBO), and MF Global
Here are Fed officials latest central tendency projections. Theprojected unemployment rate will likely be raised slightly at theupcoming FOMC meeting, but not enough to change the
estimates in the chart above significantly.%Q4/Q4, sa, unless noted 2011 2012 2013
LONGERRUN
REAL GDP 3.1-3.3 3.5-4.2 3.5-4.3 2.5-2.8
UNEMPL. RATE (Q4, %, sa) 8.4-8.7 7.6-7.9 6.8-7.2 5.2-5.6
PCE INFLATION 2.1-2.8 1.2-2.0 1.4-2.0 1.7-2.0
CORE PCE INFLATION 1.3-1.6 1.3-1.8 1.4-2.0
Source: Federal Reserve
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Taylor Rule**
Actual funds rate
Taylo r Rule, adjusted for balance sheet expansion***
Fed fund s rate, %
2011-13 estwithFed
CTPs*
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A modified original Taylor Rule, using the more observable
unemployment rate rather than the output gapand more
specifically, the unemployment gap, which is the difference
between the unemployment rate and the estimated full-
employment unemployment rateand allowing for a 0.5-point
change in the unemployment rate for every one-point change in
the output gap (roughly the Okuns Law relationship based on
recent experience), has the funds rate (%) =
2 + Inflation + 0.5 (Inflation 2) 1.0 Unemployment gap
Based on the mid-point of central tendency projections, Fed
officials are currently projecting a 1.55% trend in inflation at the
end of 2012 (using core PCE prices) and a 7.75% level for the
unemployment rate. In turn, a 7.75% unemployment rate implies
an unemployment gap of 2.35% (using the mid-point of officials
longer-term projection for the unemployment rate as the
estimated full-employment unemployment rate).
Incorporating those figures in the equation above yields a 1.0%
level for the prescribed funds rate:
2 + 1.55 + 0.5 (1.55 2) 1.0 2.35 = 1.0%
The original Taylor Rule only allowed for conventional policy
action, with stimulus provided only through the funds rate.
Meanwhile, Fed officials have estimated that every $200 billion of
balance sheet expansion is equivalent to around 25 bps of
conventional easing. A $2.0 trillion expansion of the balance
sheet, to an estimated $2.9 trillion at the end of this month from
$0.9 trillion before the crisis, is thus worth an extra 250 bps.
In the chart on page 6 we are allowing for about a $300 billion
decline in the size of the Fed balance sheet in 2012, reducing the
stimulus from that source to the equivalent of around 210 bps. As
a result, the prescribed funds rate after adjusting for the
expanded balance sheet would be around 3% at the end of 2012.
Note that the co-efficient on the unemployment gap in the
equation is 1.0, so even a 0.5 point boost to the estimated
unemployment rate would only lower the prescribed funds rate by
0.5 percentage point.
Again, we are not suggesting that these estimates be takenliterally (we are currently forecasting a 1.5% funds rate at the end
of 2012), but they provide reason to believe fixed income markets
will need to adjust significantly if the unemployment rate
continues to trend down.
At 9.1%, the May reading for the unemployment rate was up
from 8.8% in March but down from 9.6% in Q4.
Source: Bureau of Labor Statistics
We estimate the core PCE price index was up 1.1% y/y in May,
still below the 1.7-2.0% pace considered ideal by Fed officials
(based on the longer-run figure in the last set of central
tendency projections), but up from 0.8% y/y at the end of 2011.
That measure has risen at an estimated 2.0% annual rate so far
this year (May vs. December).
Inflation expectations indicators have shown little net change from
average levels in recent years; last years drop in breakeven
inflation rates priced into Treasury Inflation-Protected Securities
(TIPS) has been reversed. Continued resilience in inflation
expectations is likely helping offset the downward pressure on
inflation from the high unemployment rate.
*Including estimated 0.2% m/m rise in MaySource: Bureau of Economic Analysis, Bureau of Labor Statistics, Federal ReserveBoard, and MF Global
5.0
8.5
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15.5
19.0
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79 84 89 94 99 04 09 14
Unemployment rate
percent
May
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07 08 09 10 11 12Core PCE prices (y/y)
Core CPI (y/y)Mich igan median 5-10 year inflation expectationsTIPS 5-year, 5-year fo rward inflation compensation
%
Junprelim
Jun 14
May est*May
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MF GLOBAL U.S. ECONOMIC FORECAST SUMMARY
% change from previous period, annual rate (ar), except where noted;forecasts in bold
2010 2011 CALENDAR AVERAGE Q4/Q4
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2010 2011 2012 2010 2011 EAL GDP 3.7 1.7 2.6 3.1 1.8 3.5 4.0 4.0 2.9 2.9 3.9 2.8 3.3
FINAL SALES 1.1 0.9 0.9 6.7 0.6 3.3 4.1 4.4 1.4 3.0 3.9 2.4 3.1
DOMESTIC FINAL SALES 1.3 4.3 2.6 3.2 0.7 2.0 3.8 4.1 1.9 2.5 3.4 2.9 2.6
NET EXPORTS (pct pt contr) -0.3 -3.5 -1.7 3.3 -0.1 1.2 0.2 0.2 -0.5 0.4 0.3 -0.6 0.4
INVENTORIES (pct pt contr) 2.6 0.8 1.6 -3.4 1.2 0.2 -0.1 -0.4 1.4 -0.1 0.0 -0.3 0.2
CONSUMPTION 1.9 2.2 2.4 4.0 2.2 1.5 3.5 3.5 1.7 2.7 3.3 2.6 2.7
BUSINESS FIXED INVESTMENT 7.8 17.2 10.0 7.7 3.4 9.0 9.2 11.5 5.7 8.1 8.2 10.6 8.2
STRUCTURES -17.8 -0.5 -3.6 7.7 -16.8 12.0 4.0 4.0 -13.7 -0.8 4.9 -4.0 0.2
EQUIPMENT & SOFTWARE 20.5 24.8 15.4 7.7 11.6 8.0 11.0 14.0 15.3 11.4 9.3 16.9 11.1
RESIDENTIAL INVESTMENT -12.3 25.6 -27.3 3.3 -3.3 1.0 12.0 12.0 -3.0 -0.5 13.6 -4.6 5.6
EXPORTS 11.4 9.1 6.7 8.6 9.2 10.0 11.0 11.0 11.7 9.3 11.3 8.9 10.3
IMPORTS 11.2 33.5 16.8 -12.6 7.6 1.0 7.5 7.5 12.6 4.6 7.1 10.9 5.8
GOVERNMENT -1.6 3.9 3.9 -1.7 -5.1 0.5 1.2 1.5 1.0 -0.6 0.5 1.1 -0.5
INVENTORIES (ch $bil ar) 44 69 121 16 52 59 56 43 63 53 55 16 43
PI 1.3 -0.5 1.4 2.6 5.2 3.9 1.1 1.1 1.6 2.9 1.9 1.3 2.8
CORE CPI 0.0 0.8 1.1 0.6 1.7 2.4 1.7 1.5 1.0 1.5 1.9 0.7 1.8
ORE PCE PRICES 1.2 1.0 0.5 0.4 1.4 1.9 1.4 1.2 1.3 1.2 1.8 0.8 1.5
NEMPLOYMENT (%, level) 9.7 9.6 9.6 9.6 8.9 9.0 8.8 8.6 9.6 8.8 8.1 9.6 8.6
EDERAL BUDGET BAl($bil, fy) -1294 -1350 -1050
% OF GDP -9.2 -8.9 -6.5
NTEREST RATES (%, level, eop) End of year
FED FUNDS TARGET 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.1 0.1 1.0 0.13 0.13
2-YEAR TREASURY 1.0 0.6 0.4 0.6 0.8 0.5 1.1 1.5 0.7 1.0 2.2 0.6 1.5
10-YEAR TREASURY 3.8 3.0 2.5 3.3 3.5 3.1 3.6 3.9 3.2 3.5 4.1 3.3 3.9
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, US Treasury, Federal Reserve Board, and MF Global
FORECAST SUMMARY
We believe much of the weakness in real GDP in Q1 reflected
volatility and weather effects rather than a weaker trend, with
payback likely in Q2; we forecast a 3.5% annual rate for Q2
following 1.8% in Q1. The net result is a 2.7% first-half average,
weaker than data were suggesting as the year began, with much
of the setback likely due to the Q1 spike in energy costs and
supply chain effects stemming from the crisis in Japan. We still
forecast a 4.0% pace in the second half of this year, althoughrecent data clearly suggest downside risk. Real GDP growth
averaged 2.9% at an annual rate in the first year and a half of the
recovery (through 10Q4).
Prior to the latest data, employment growth appeared to be
picking up significantly in 2011. We expect momentum to pick up
again soon, consistent with at least a gradual downtrend in the
unemployment rate. Although the unemployment rate rose in April
and May, the 9.1% level in May was down from 9.6%, on
average, in 10Q4.
While we believe ample slack will keep inflation fairly tame, even
core inflation now appears to be edging up again. We expect the
pace in the core PCE price index to move up from 0.8% in 2010
to 1.5% in 2011 and 1.7% in 2012 (Q4/Q4). Overall inflation will
likely be higher than core inflation this year, due to a net rise in
food and energy prices. A still-high (but declining) unemploymentrate and tame inflation will likely allow the Fed to be patient in
unwinding stimulus; we forecast a still-low 1.5% funds rate at the
end of 2012, with the first increase in Q1 of 2012. Some
tightening in 2012 will likely also come via Fed balance sheet
shrinkage; we expect Fed officials to complete the $600 billion
asset purchase program and then hold the balance sheet
constant in 11H2. We expect Treasury yields will rise, with 10-
year yields up to 3.9% at the end of 2011 and 4.2% at the end of
2012.
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DATA PREVIEW
WEEKLY STORE SALES (TUE, JUN 21, 07:45/08:55)
MAY 28 JUN 4 JUN 11 JUN 18
WEEKLY ICSC, %w/w, sa 0.4 0.4 -0.8
WEEKLY ICSC, %y/y 2.8 2.5 2.4
REDBOOK, %y/y 3.6 4.2 3.2
APR MAYJUN
THRU 11JUN
THRU 18
WEEKLY ICSC, %m/m, sa 2.5 -2.3 -0.7
REDBOOK, %m/m, sa 1.3 -2.7 0.8
MONTHLY ICSC, %m/m, sa 0.3 -2.6
WEEKLY ICSC, %y/y 3.0 3.0 2.5
REDBOOK, %y/y 5.1 3.9 3.7
MONTHLY ICSC, %y/y 8.5 5.4
Note: monthly data are based on the retail industry's fiscal calendar, the fiscal monthof June ends on July 2.Source: International Council of Shopping Centers, Instinet, and MF Global
The weekly store sales indexes have been mixed so far in June,
providing no clear signal. (The Redbook index is up at a 0.8%
m/m pace, while the ICSC index is down at a 0.7% m/m pace.)
The indexes were weaker than the comparable retail sales data in
May.
EXISTING HOME SALES (THU, JUNE 21, 10:00)MAY EST
FEB MAR APR CONS MF
TOTAL (000s, saar) 4920 5090 5050 4800 4900
%m/m -8.9 3.5 -0.8 -5.0 -3.0
%y/y -2.0 -6.4 -12.9 -13.7
MONTHS' SUPPLY 8.5 8.3 9.2
MEDIAN PRICE (%y/y) -5.2 -5.8 -5.0
Source: National Association of Realtors, Bloomberg, and MF Global
Existing home sales probably fell again in May, even if the plunge
in the pending home sales index in April (-11.6% m/m) overstated
weakness.
Despite the likely decline, the trend in sales continues to look
close to flat (at a low level). Our 4.900 million-unit-pace forecast
for May is virtually identical to the 4.908 million total for 2010.
The level is still down sharply from the annual peak of 7.076
million in 2005. Moreover, post-2007 data are likely to be revised
down later this year to account for apparent double-counting. The
expected revision will likely not affect the most recent trajectory
significantlyjust the levels.
Existing home sales have been exceptionally volatile during the
last two years, likely reflecting tax credit and weather effects. The
net result has been a near-flat trend: sales totaled 4.9 million in
2008, 5.1 million in 2009, and 4.9 million in 2010.
Source: National Association of Realtors
MORTGAGE APPLICATIONS (WED, JUN 22, 07:00)
MBA indexesPURCHASE
INDEXREFI INDEX 30-YEAR
MORTGAGERATE %WKLY
4-WKAVG
WKLY 4-WK AVG
MAY 20 191.4 189.4 2591.7 2377.7 4.69
MAY 27 191.4 191.6 2442.9 2468.0 4.58
JUN 3 182.9 188.6 2475.7 2519.6 4.54
JUN 10 191.1 189.2 2883.7 2598.5 4.51
JUN 17
Source: Mortgage Bankers' Association
The purchase index continues to show little net change,
consistent with a near-flat trend in home sales. At 189.2, the
latest four-week average is virtually unchanged from 191.9, on
average, in Q4, although it is up a little from 186.4 in Q1.
FHFA HOUSE PRICE INDEX (WED, JUN 22, 10:00)APR EST
JAN FEB MAR CONS MF
PURCHASE-ONLY INDEX
%m/m, sa -1.2 -1.5 -0.3 -0.3 0.0
%m/m, nsa -1.5 -0.9 0.0 0.6
%y/y -4.9 -5.5 -5.9 -5.8
Source: Federal Housing Finance Agency, Bloomberg, and MF Global
Home price indexes may be stabilizing after a several months of
declines. That pattern has been suggested by already released
CoreLogic and Radar index data for March.
3700
4430
5160
5890
6620
7350
70
82
94
106
118
130
01 02 03 04 05 06 07 08 09 10 11 12
PHSI (l) Existing home sales (r)
index, sa 000s, saar
Apr
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Home prices have weakened again recently, although net
changes since mid-2009 have generally been modest. Data
already available for April suggest weakening may be ending.
*FHFA and S&P/Case Shiller through March; Radar Logic through mid-April;CoreLogic through April.Source: CoreLogic, Federal Housing Finance Agency, Standard & Poor's, Fiserve,MacroMarkets LLC, and Radar Logic
The weakening in home prices recently has been concentrated
in distressed-sale homes.
Source: CoreLogic
FOMC STATEMENT AND PRESS BRIEFING (WED, JUNE 22, 12:30 &14:15)Fed officials central tendencyprojections; %Q4/Q4, sa,unless noted 2010 2011 2012 2013
LONGR
REAL GDP
NOV 10 2.4-2.5 3.0-3.6 3.6-4.5 3.5-4.6 2.5-2.
JAN 11 NA 3.4-3.9 3.5-4.4 3.7-4.6 2.5-2.
APR 11 NA 3.1-3.3 3.5-4.2 3.5-4.3 2.5-2.
UNEMPL. RATE (Q4 level, %, sa)
NOV 10 9.5-9.7 8.9-9.1 7.7-8.2 6.9-7.4 5.0-6.
JAN 11 NA 8.8-9.0 7.6-8.1 6.8-7.2 5.0-6.
APR 11 NA 8.4-8.7 7.6-7.9 6.8-7.2 5.2-5.
PCE INFLATION
NOV 10 1.2-1.4 1.1-1.7 1.1-1.8 1.2-2.0 1.6-2.
JAN 11 NA 1.3-1.7 1.0-1.9 1.2-2.0 1.6-2.
APR 11 NA 2.1-2.8 1.2-2.0 1.4-2.0 1.7-2.
CORE PCE INFLATION
NOV 10 1.0-1.1 0.9-1.6 1.0-1.6 1.1-2.0
JAN 11 NA 1.0-1.3 1.0-1.5 1.2-2.0
APR 11 NA 1.3-1.6 1.3-1.8 1.4-2.0
MEMO: MF FORECASTS
REAL GDP 2.8* 3.3 3.9
UNEMP. RATE (Q4 level, %,
sa)9.6* 8.6 7.8
CORE PCE INFLATION 0.8* 1.5 1.7
*Already reported. Source: Federal Reserve and MF Global
Updated economic projections from Fed officials are expected to
be released at 2:15 pm on June 22, coinciding with the start of th
chairmans post-meeting press briefing. The FOMC statement is
scheduled to be released around 12:30 pm. (See page 2 for
more.)
The updated projections will likely include a lowering of expected
real GDP growth in 2011 (from 3.1-3.3% in April, based on the
central tendency projections), along with a slight raising of the
projected unemployment rate in 11Q4 (from 8.4-8.7%). The 2012
growth projections could also be lowered slightly, consistent with
officials viewing the weaker than expected data recently asindicative of a weaker than expected underlying trend and not jus
short-term factors. Such changes would reinforce the impression
that Fed officials are in no rush to start withdrawing stimulus. We
do not expect any significant change to the inflation projections
this time.
130
150
170
190
210
05 06 07 08 09 10 11 12
CoreLogic home pr ice index: total
CoreLogic home price index: excluding distressed sales
in dex, January 2000=100, nsa
Apr
61
72
83
94
105
06 07 08 09 10 11
FHFA house price index (purchase only, sa)
S&P/Case Shi ller index (composite 20, sa)
CoreLogic home pr ice index (nsa)
Radar Logic house price index (nsa)
index, June 2006 = 100
Mar/Apr*
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JOBLESS CLAIMS (THU, JUN 23, 08:30)
NEW CLAIMS (000s, sa) CONTINUING CLAIMS (000s)
WKLY4-WKAVG
REGULAR EXTENDED* TOTAL
sa nsa sa** sa**
MAY 14*** 414 440 3718 4043 4238 7956
MAY 21 429 440 3747 4000 4268 8015
MAY 28 426 427 3696 3885 4191 7887
JUN 4 430 425 3675
JUN 11 414 425
JUN 18*** CONS 412 421
MF 415 421
*Sum of federal extended and emergency claims**Using seasonal factors for regular continuing claims***Sample week for employment reportSource: Department of Labor, Bloomberg, and MF Global
Jobless claims are down from as high as 478,000 in late April, but
still up from just below 400,000 in March. The pattern suggests
net weakening, albeit not nearly to the degree implied by the May
employment report. Claims remain important to watch.
Some, but not all, of the recent spike in claims has been
reversed.
Source: Department of Labor and MF Global
NEW HOME SALES (THU, JUN 23, 10:00)MAY EST
FEB MAR APR CONS MF
NEW HOME SALES (000s, saar) 278 301 323 310 295
%m/m -10.3 8.3 7.3 -4.0 -8.7
%y/y -19.2 -21.8 -23.1 5.0
MONTHS' SUPPLY 7.9 7.2 6.5
MEDIAN PRICE (%y/y) -1.8 -4.6 4.6
Source: Census Bureau, Bloomberg, and MF Global
New home sales probably reversed the rise in last months report
consistent with the underlying trend being no better than flat.
Indeed, the early-June homebuilder survey suggested net
weakening. Sales averaged a 296,000-unit annual rate in Q1,
identical to the pace in the second half of 2010.
MONETARY AGGREGATES (THU, JUN 23, 16:30)
MAY 23 MAY 30 JUN 6 JUN 13
M1 (billions of $, saar) 1939 1961 1939
%ch from 13 weeks
ago, saar13.7 13.4 15.7
%y/y 14.0 14.7 13.5
M2 (billions of $, saar) 9005 9018 9026
%ch from 13 weeks
ago, saar5.1 4.9 4.8
%y/y 5.1 5.0 5.2
Source: Federal Reserve Board
At 5.2%, the y/y change in M2 is up from 4.3% in Q1 and 2.3% in
all of 2010.
FED BALANCE SHEET (THU, JUN 23, 16:30)
billions of dollars unless noted, nsa JUN 1 JUN 8 JUN 15 JUN 22
TOTAL FED ASSETS 2793 2815 2832
%y/y 19.4 20.6 20.6
SECURITIES HELD OUTRIGHT 2569 2592 2609
US TREASURIES 1532 1555 1576
FEDERAL AGENCY 119 119 118
MORTGAGE-BACKED 918 918 915
OTHER LOANS 14 13 13
PRIMARY CREDIT 0 0 0
TALF 14 13 13
MAIDEN LANE LLC (I*, II**, &
III***)64 62 61
CENTRAL BANK LIQY SWAPS 0 0 0
OTHER ASSETS 146 149 149
MONETARY BASE (2-wk avg) 2601 2665 2665
% y/y 29.3 32.9 32.9
* Bear Stearns assets. ** AIG CDO assets. *** RMBS assets.Source: Federal Reserve Board
TheFeds $600 billion purchase plan will likely boost total Fedassets to around $2.875 trillion.
270
370
470
570
670
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11
4-week average Weekly
in itial claims, 000s, sawr
Jun 11
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DURABLE GOODS (FRI, JUN 24, 08:30)MAY EST
FEB MAR APR CONS MF
TOTAL ORDERS (%m/m, sa) -1.1 4.6 -3.6 1.6 1.7
EX TRANSPORTATION -0.6 2.6 -1.6 1.0 1.0
EX DEFENSE 0.6 4.2 -3.8 1.7
EX CIVILIAN AIR & DEFENSE -1.0 4.3 -2.2 0.8
NONDEF. CAPITAL GOODS 4.8 5.0 -7.1
EX AIRCRAFT -0.1 5.4 -2.3 1.1 2.0
TOTAL SHIPMENTS (%m/m, sa) 0.0 3.1 -1.3
NONDEF. CAP GOODS EX AIR -0.2 3.7 -1.5
INVENTORIES (%m/m, sa) 1.2 1.7 0.9
INVENTORY-TO-SALES RATIO 1.32 1.30 1.32
Source: Census Bureau, Bloomberg, and MF Global
Durable goods orders have alternated between up and down for
10 consecutive months. The streak probably continued in May
(with a rise). On balance, the rate of growth in orders appears to
have slowed in recent months.
Orders for nondefense capital goods excluding aircraft have
tended to be weak in the first month of each quarter recently,
followed by a rebound in the next two months. Consistent with
that pattern, we forecast a solid rise in May.
Source: Census Bureau
GDP (FRI, JUN 24, 08:30)
11Q1 3R
EST
% q/q, saar, unless noted 10Q3 10Q411Q1
2ND
EST
CONS M
REAL GDP 2.6 3.1 1.8 1.9 2
FINAL SALES 0.9 6.7 0.6 0
DOMESTIC FINAL SALES 2.6 3.2 0.7 0
NET EXP. (contr. % pts.) -1.7 3.3 -0.1 0
INVENTORIES (contr. % pts.) 1.6 -3.4 1.2 1
INVENTORIES (ch, bil saar) 121 16 52 5
CONSUMPTION 2.4 4.0 2.2 2.2 2
BUSINESS FIXED INVEST 10.0 7.7 3.4
STRUCTURES -3.6 7.7 -16.8
EQUIP & SOFTWARE 15.4 7.7 11.6
RESIDENTIAL INVESTMENT -27.3 3.3 -3.3
EXPORTS 6.7 8.6 9.2
IMPORTS 16.8 -12.6 7.6
GOVERNMENT 3.9 -1.7 -5.1
FEDERAL 8.8 -0.3 -7.9
STATE & LOCAL 0.7 -2.6 -3.2
NOMINAL GDP 4.6 3.5 3.8 4
CHAIN PRICE INDEX 2.1 0.4 1.9 1.9 1CORE PCE PRICE INDEX 0.5 0.4 1.4 1.4 1
REAL GDP (%y/y) 3.2 2.8 2.3 2
NOMINAL GDP (%y/y) 4.5 4.2 3.9 4
CHAIN PRICE INDEX (%y/y) 1.2 1.3 1.6 1
CORE PCE PRICES (%y/y) 1.2 0.8 0.9 0
PERSONAL SAVING RATE (%) 6.0 5.4 5.1 5
NOM WAGE INCOME 3.5 1.7 3.3
(%y/y) 2.9 3.0 3.7
10Q3 10Q4 11Q1
REAL GDI* (%q/q, saar) 1.2 3.9 1.2
(%y/y) 3.7 3.0 2.2
BOOK PROFITS, AFTER TAX (%q/q, saqr) 2.4 -3.3 5.9
(%y/y) 27.2 11.4 5.8
PROFITS FROM CURRENT
PRODUCTION, PRE-TAX
(%q/q, saqr)
1.6 2.3 1.3
(%y/y) 26.4 18.3 8.5
*Nominal GDI deflated by MF Global using GDP price indexSource: Bureau of Economic Analysis, Bloomberg, and MF Global
The Q1 growth rate will probably be revised up, mainly reflecting
new data on foreign trade and inventories.
46
50
54
58
62
6670
05 06 07 08 09 10 11
3-month average Monthly
orders for nondefense cap ital goods ex air, $bil , samr
Apr
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June 13July 8MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY
13
(09:30) Richmond Feds Lacker(11:00) 4-wk BillAnnouncement(11:00) Fed purchase op(11:30) 3- & 6-mth Bill Auction(19:00) Dallas Feds Fisher
14
(07:30) May NFIB(07:45/08:55) Store Sales(08:30) May PPI(08:30) May Retail Sales(10:00) Apr Inventories(11:00) Fed purchase op(11:30) 4-wk Bill Auction(15:30) Fed ChairmanBernanke speaks on fiscalsustainability, in Washington(text, no Q&A)
15
(07:00) Mortgage Apps(08:30) May CPI(08:30) Jun NY Fed(09:00) Apr TICS(09:15) May Indust Prod(10:00) Jun NAHB HMI(11:00) Fed purchase op
16
(08:30) Initial Claims(08:30) May Starts/Permits(08:30) Q1 Current Account,including annual revision(10:00) Jun Phil Fed(11:00) 3- & 6-mth Bill & 30-yr(r) TIPS Announcement(11:00) Fed purchase op(13:10) Dallas Feds Fisher(16:30) Fed Bal Sheet/Money
17
(09:55) Jun prelim Michigan(10:00) May Lead Ind(11:00) Fed TIPS purchase op
20
(11:00) 4-wk BillAnnouncement(11:00) Fed purchase op(11:30) 3- & 6-mth Bill Auction(14:00) Fed purchase op
21
(07:45/08:55) Store Sales(10:00) May Exist Home Sales
4900Ke/-3.0%m/m(11:00) Fed purchase op(11:30) 4-wk Bill Auction
22
(07:00) Mortgage Apps(10:00) CBO releases 2011Long-Term Budget Outlook(10:00) Apr FHFA 0.0%e(12:30) FOMC Statement(14:15) Fed ChairmanBernanke to hold post-FOMCmeeting press briefing
23
(08:30) Initial Claims 415Ke(10:00) May New Home Sales
295Ke/-8.7%m/m(11:00) 3- & 6-mth, & 1-yr Bill,2-yr, 5-yr & 7-yr NoteAnnouncement(11:00) Fed purchase op(13:00) 30-yr (r) TIPS auction(16:30) Fed Bal Sheet/Money(19:00) Chicago Feds Evans
24
(08:30) May Durables 1.7%eEx trans 1.0%e
(08:30) Q1 GDP (3rd
est) 2.3%e(11:00) Fed purchase op
27
(08:30) May Personal Income(10:30) Jun Texas Mfg.(11:00) Minneapolis FedsKocherlakota(11:00) 4-wk BillAnnouncement(11:00) Fed purchase op(11:30) 3- & 6-mth Bill Auction(13:00) 2-yr Note Auction(13:00) KC Feds Hoenig
28
(07:45/08:55) Store Sales(09:00) Apr S&P/CS(10:00) Jun Conf. Board(10:00) Jun Richmond Fed(11:00) Fed purchase op(11:30) 4-wk & 1-yr Bill Auction(12:00) Dallas Feds Fisher(13:00) 5-yr Note Auction
29
(07:00) Mortgage Apps(10:00) May PHSI(10:00) Jun Help Wanted(11:00) Fed purchase op(13:00) 7-yr Note Auction
30
(08:30) Initial Claims(09:00) St. Louis Feds Bullard(09:45) Jun Chicago PMI(10:00) Jun Milwaukee Fed(11:00) Jun KC Fed(11:00) 3- & 6-mth BillAnnouncement(11:00) Fed purchase op(13:00) KC Feds Hoenig
1
(09:55) Jun Michigan(10:00) May Construction(10:00) Jun Mfg ISM
Jun Lt Vehicle Sales
4
Independence Day
Markets closed
5
(10:00) May Factory Orders(11:00) 4-wk BillAnnouncement(11:30) 3- & 6-mth Bill Auction
6
(07:00) Mortgage Apps(07:45/08:55) Store Sales(08:30) Jun NonMfg ISM(11:00) Fed purchase op(11:30) 4-wk Bill Auction
7
(08:15) June ADP(08:30) Initial Claims(11:00) 3- & 6-mth Bill, 3-yr, 10-yr (r) Note, & 30-yr (r) BondAnnouncement(12:30) KC Feds Hoenig
Jun Chain Store Sales
8
(08:30) Jun Employment(15:00) May Consumer Credit
MARKET LETTER DISCLAIMER (this is not a research report): This market letter was prepared for informational purposes only. It is based upon information generally available to the public from source
believed to be reliable, but MF Global Inc. makes no representation that it is accurate, complete, current, or that any returns indicated or projections made will be achieved. MF Global is not responsible fo
any errors or omissions in this market letter. Changes to assumptions may have a material impact on projections or returns contained or made herein. Furthermore, past performance is not necessaril
indicative of future results. Additional information regarding the information contained in this market letter is available from MF Global upon request. This market letter is neither an offer to sell nor solicitatio
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