mfm jul 15 2011

8/6/2019 MfM Jul 15 2011

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MACRO FOR MARKETS

mfglobal.com

Still Expecting H2 Pickup, but Growth Forecast TrimmedAs suggested last week, we have cut our estimate for Q2 real GDP growth following the release

of several key sets of input data. We now estimate a 2.3% q/q annualized rate, slightly better

than the 1.9% pace in Q1 but down from our earlier estimate of 3.5%.

Whats next? On the positive side, we continue to believe recent weakening has been

exaggerated by factors that will fade or reverse: gasoline prices have declined, auto production is

scheduled to rebound by enough to add a point to Q3 growth, and claims are showing tentative

signs of improvement. More broadly, some of the headwinds that have been holding back the

recovery appear to be lessening over time. In the other direction, business and consumer

confidence continues to be fragile, with risk aversion after the crisis more persistent than weanticipated. In part, that pattern reflects financial markets and fiscal policy concerns, some of

which should fade. The net result: we still see the recovery improving over time, but we are

trimming our GDP growth forecasts for coming quarters by around 0.5 point at an annual rate.

We now expect real GDP to increase at a 3.5% pace over the next year and a half. We expect

the unemployment rate (currently 9.2%) to be 9.0% in Q4 of 2011 (instead of 8.8%) and 8.3% in

Q4 of 2012 (instead of 7.9%). We now forecast the first Fed rate hike in June 2012 (instead of

March), with the funds rate up to 1.0% at the end of 2012 (instead of 1.5%).

Preview: More Clarity on Fiscal Issues?A key focus in coming weeks will be how fiscal policy negotiations evolve. While the debt limit

impasse does not appear to have directly affected financial markets significantly, we suspect the

threat of default and a rating downgrade have weighed on consumer and business confidence.

In a light week for data, we forecast near-flat readings for housing starts, existing home sales, the

housing market index, and the FHFA home price index. We expect the current activity index in

the Philadelphia Fed survey to show a reversal of some of last months weakening. We forecast

little change in jobless claims after last weeks large drop.

Jobless claims may be starting to decline again.

Source: Department of Labor and MF Global

Economic Analysis | US

JAMES F. OSULLIVAN STEPHANIE S. CHENG

Chief Economist Economist

+1 212 589 6479 +1 212 589 6373

[email protected] [email protected]

CONTENTS

Pg. 2 | Still Expecting H2 Pickup,but Growth ForecastTrimmed

Pg. 7 | Forecast Summary

Pg. 8 | Data Preview

Pg. 13 | Calendar

JULY 15, 2011 INSTITUTIONAL USE ONLY MF Global Weekly Report

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

Jul 9

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7/15/2011 |MACRO FOR MARKETS

STILL EXPECTING H2 PICKUP, BUT GROWTH FORECASTTRIMMED

As suggested last week, we have cut our estimate for Q2 real

GDP growth following the release of several key sets of input

data. We now estimate a 2.3% q/q annualized rate, slightly better

than the 1.9% pace in Q1 but down from our earlier estimate of

3.5%. (See details on page 7.) Some other data have looked

even weaker in recent months, most notably the last two

employment reports.

Whats next? On the positive side, we continue to believe recent

weakening has been exaggerated by factors that will fade or

reverse.

Real spending power is being boosted by a drop in gasoline

prices.

After being depressed by Japan supply-chain effects, auto

production is scheduled to rebound by enough to add about apercentage point to annualized Q3 GDP growth.

Jobless claims are showing tentative signs of improvement.

More broadly, we continue to believe that some of the headwinds

that have been holding back the recovery since it began are

lessening over time (e.g., banks have begun to ease lending

standards, commercial construction is stabilizing, and the drag

from household sector deleveraging appears to be moderating).

In the other direction, business and consumer confidence

continues to be fragile, with risk aversion after the crisis more

persistent than we anticipated. In part, that pattern reflects

financial markets and fiscal policy concerns, some of whichshould fade.

The net result: we still see the recovery improving over time, with

employment growth accelerating and unemployment trending

lower, but we are trimming our GDP growth forecasts for coming

quarters by around 0.5 point at an annual rate.

For real GDP, we now forecast a 3.5% pace in the second half

of 2011 (instead of 4.0%), and 3.5% on a Q4/Q4 basis in 2012

(instead of 3.9%). That is still somewhat stronger than

expected by the consensus (3.2% in H2 11 and 3.0%, on

average, in 2012according to Bloombergs survey). Growth

averaged an estimated 2.7% pace in the first eight quarters ofthe recovery (including our 2.3% estimate for last quarter).

We now expect the unemployment rate to drop to 9.0% in Q4

of 2011 (instead of 8.8%) and 8.3% in Q4 of 2012 (instead of

7.9%). At 9.2%, the June 2011 level was up from 8.8% three

months earlier but still down from 9.6% in Q4 of 2010 and

10.0% in Q4 of 2009.

U.S. vehicle production dropped from 8.4 million units at an

annual rate in Q1 to 7.9 million in Q2. It is scheduled to rebound

to a 9.4-million pace in Q3.

millions of units, saar, unless noted otherwise

LEVEL %q/q, saa

10Q3 8.1 33.5

10Q4 7.8 -15.8

11Q1 8.4 36.7

11Q2 7.9 -23.9

11Q3-scheduled 9.4 103.9

LEVEL %m/m, sa

JAN 11 8.0 4.4

FEB 11 8.5 6.0

MAR 11 8.8 4.0

APR 11 7.9 -10.8

MAY 11 7.9 0.9

JUN 11 7.8 -1.5

JUL 11 scheduled 9.3 19.3

AUG 11 scheduled 9.6 2.7

SEP 11 scheduled 9.4 -1.8

Source: Federal Reserve Board, Ward's Automotive, and MF Global

The scheduled increase in auto production, if realized, would

likely add a full point to annualized GDP growth in Q3.

Source: Federal Reserve Board, Bureau of Economic Analysis, Ward's Automotive,and MF Global

-2.8

-1.4

0.0

1.4

2.8

-2

-1

0

1

2

06 07 08 09 10 11 12

Con tribution to real GDP growth (l)

Chan ge in U.S. motor vehicle production (r)

pct. pts , q/q, saar

Q3

millions of uni ts, ch, q/q, saar

Q1

productionschedule

Q2

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Despite the lowering of growth projections, we have raised

slightly our inflation forecasts for 2011, mainly reflecting the

pickup in recent months, including a second consecutive 0.3%

m/m rise in the core CPI in June (more below). On a Q4/Q4

basis, we now forecast a 3.0% rise in the total CPI and a 2.0%rise in the core CPI in 2011 (instead of 2.8% and 1.8%,

respectively). We have not changed our 2012 forecast (2.1%

total, 2.0% core). For core PCE prices, we now forecast a

1.7% rise in 2011 (up from 1.5%) and 1.7% again in 2011 (as

before).

The change to the inflation forecast partly offsets the monetary

policy implications of the change in the growth forecast, but we

have pushed back the first Fed rate hike to June 2012 from

March 2012, with the funds rate now expected to be 1.0% at

the end of 2012 instead of 1.5%. (Fed funds futures contracts

are currently priced for a 0.4% funds rate at the end of 2012.)

Some tightening in 2012 will likely also come via balance sheetshrinkage. (We do not expect any new stimulus initiatives this

year, with Fed officials effectively freezing their balance sheet

through Q1 of next year.)

The sharp drop in vehicle sales in May and June was

concentrated in the Japanese brands, consistent with much of

the weakening being due to inventory shortages related to

supply-chain effects.

*Estimated by MF Global, applying same seasonal adjustment factors to Japanesebrand sales as used by the Bureau of Economic Analysis for total sales.Source: Bureau of Economic Analysis, Automotive News, and MF Global

The architects billings index for commercial and industrial

activity has been signaling a fading of weakness in private

nonresidential construction. The plunge in construction in Q1

GDP was likely weather-related.

Source: Bureau of the Census and American Institute of Architects

The Feds Senior Loan Officer Opinion Survey has been

showing an easing of lending standards on most categories of

loans, including commercial and industrial (C&I) loans (below).

The main exception has been residential mortgages.

Source: Federal Reserve Board

-30

0

30

60

90

90 92 94 96 98 00 02 04 06 08 10

Large and medium Small

Net percentage of d omestic respondents tightening standardsfor C&I loans, by size of business seeking loan

Apr

26

38

50

62

74

-50

-25

0

25

50

98 00 02 04 06 08 10 12

Private n onresidential construction (l )AIA commercial and industrial billings index (r)

% from 3 months ago, saar index,sa

May

2

4

6

8

10

Jan-08 Jul -08 Jan-09 Jul -09 Jan-10 Jul -10 Jan-11

U.S. light vehicle sales: Japanese brands*

U.S. light vehicle sales: ex-Japanese brands*

millions of un its, saar

Jun

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Still Waiting for More Clarity on Fiscal Issues

Apart from the data, a key focus in coming weeks will be how

fiscal policy negotiations evolve. We are assuming that the debt

limit impasse will be resolved before it leads to any missed

payments on principal or interest. (We expect the Treasury toprioritize those payments if needed.) We are also assuming that

any new deficit reduction measures are spread out over many

years, with only minimal impact prior to 2013, and that this years

temporary payroll tax cut, and also extended unemployment

benefits, will be renewed for another year. We are still allowing for

some tightening of fiscal policy in the coming year, reflecting the

phasing down of the 2009 stimulus package and the FY11 cut in

budget authority for discretionary spending (which will be

reflected in budget outlays with a lag). Our call for somewhat-

above-trend growth in 2012, despite that drag, reflects our

expectation that the private sector recovery will continue to gather

momentum.

While the debt limit impasse does not appear to have directly

affected sentiment in financial markets significantly (with Treasury

yields remaining low), we suspect the threat of default and a

sovereign rating downgrade have weighed on business and

consumer confidence. In turn, the brinkmanship has likely

compounded the slowing in growth recently. The Michigan

sentiment index fell in June and again in early July, mirroring

weakness in the Rasmussen index. Other factors have clearly

also affected confidence, including the weaker than expected

employment data, but we believe resolution of the debt limit

impasse would remove one important source of anxiety for

consumers and business leaders.

The household sector financial balance is down only marginally

over the past year, although even a flattening in that measure is

consistent with a fading of the drag from deleveraging.

Note: Shaded bars represent periods of recession.Source: Federal Reserve Board, Bureau of Economic Analysis, and MF Global

Business sector as well as consumer confidence has weakened

recently.

Source: National Federation of Independent Business (NFIB) and The Conference

Board

The weakening in the Michigan sentiment index mirrors the

pattern in the daily Rasmussen index.

Source: University of Michigan and Rasmussen Reports

-7.0

-3.5

0.0

3.5

7.0

10.5

60 65 70 75 80 85 90 95 00 05 10

Househ old sector financial balance

% of disposable income

11Q1

20

30

40

50

60

70

80

80

85

90

95

100

105

110

81 84 87 90 93 96 99 02 05 08 11 14

NFIB optimism index (l)

Con ference Board CEO confidence index (r)

ind ex, both scales

Q2

50

65

80

95

50

60

70

80

Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11

Uni versity of Michigan sentiment index (l)Daily Rasmussen consumer index (r)

index, monthly index, daily

Jul 15

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Claims dropped from 427,000 to 405,000 in the first full week of

July. Moreover, the latest reading included an 11,500 boost from

budget-dispute-related furloughing of state workers in Minnesota.

Unfortunately, the claims data are especially volatile and

unreliable in early July, reflecting seasonal adjustment challengesrelated to annual summer shutdowns in the auto industry. While

we expect claims to trend lower this quarter, we caution against

extrapolating yet.

Pickup in Core Inflation Makes QE3 Highly Unlikely

As noted, the core CPI continued to show acceleration in June,

despite the weaker growth data recently. The 0.3% m/m increase

boosted the 2011-to-date increase (June vs. December) to 2.5%

at an annual rate from 2.4% through May and 2.1% through April.

The core CPI rose just 0.8% in 2010 (December to December).

Some of the recent pickup in core inflation has reflected factors

that have also contributed to the slowing in growth, notably Japansupply-chain effects (which led to inventory shortages and a

sharp pickup in new and used vehicle prices) and higher

commodity prices (which likely led to some pass-through effects

on core items). In turn, core inflation is likely to slow significantly

in coming months as those sources of acceleration fade or

reverse. Even so, the net result is likely to be a clear pickup for

2011 as a whole; the pickup so far this year has been fairly broad-

based.

The pickup in inflation makes a third round of asset purchases by

the Fed highly unlikely, in our view, unless the recovery truly

falters. Indeed, while the Fed chairman raised the possibility of

more stimulus in his testimony on July 13 and 14, he also madeclear that new stimulus would require a significant reversal of the

recent pickup in inflation and not just weakness in growth. Here is

what Mr. Bernanke said in response to a question:

I think the important point to make is that the situation today is

somewhat different than it was in August of 2010, when we began

to initiate discussion of further purchases of securities. At that

time, inflation was dropping, inflation expectations were dropping.

It looked like deflation was becoming a potential risk to the

economy and a serious risk. At the same time, over the summer

the recovery looked like it was stalling

Today, the situation is more complex. Inflation is higher. Inflation

expectations are close to our target. We are uncertain about the

near-term developments in the economy, we'd like to see if in fact

the economy does pick up as we are projecting. And so, you

know, we're not prepared at this point to take further action.

The core CPI shows a 2.5% annual rate so far this year (June vs.

December), up from 0.8% in 2010 (December to December).The

pickup has been fairly broad-based, although three categories

have been especially important contributors: shelter (mainly

rents), vehicles (new and used), and apparel.

% ch, annual rate,unless noted

2010*2011THRU

JUNE**

ACCEL/DECEL.(2011 vs.

2010,pct pcts)

CONTRIBUTTO

ACCEL/DECEpct pts.)

CORE CPI 0.8 2.5 1.7 1.

SHELTER (41.6%) 0.4 1.6 1.1 0.

RESIDL RENT (7.7%) 0.8 1.5 0.7 0.

OER (32.4%) 0.3 1.3 1.0 0.

LODGING (1.0%) 2.5 11.6 9.1 0.

FURNISH/OPS (5.9%) -2.5 0.8 3.3 0.

APPAREL (4.8%) -1.1 4.8 5.9 0.

NEW VEHICLES (5.6%) -0.2 8.3 8.5 0.

USED VEHICLES (2.6%) 3.7 9.4 5.8 0.

AIRFARES (1.0%) 5.8 4.4 -1.4 0.

MEDICAL CARE (8.4%) 3.3 3.1 -0.2 0.

RECREATION (8.3%) -0.8 1.3 2.0 0.

EDUC, COMMUN (8.3%) 1.3 1.5 0.2 0.

OTHER (4.5%) 1.9 0.7 -1.2 -0.

*December 2010 vs. December 2009 (nsa)**June 2011 vs. December 2010 (sa)Source: Bureau of Labor Statistics and MF Global

Along with the core CPI, the core PCE price index has also beenaccelerating. Inflation expectations indicators have shown little

net change from average levels in recent years; although last

years drop in breakeven inflation rates priced into Treasury

Inflation-Protected Securities (TIPS) has been reversed.

Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Federal ReserveBoard, and MF Global

01

1

2

2

3

3

4

4

0

1

2

3

4

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

%

Julprelim

Jul 12

May

Jun

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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 1.9 2.3 3.5 3.5 2.9 2.6 3.4 2.8 2.8

FINAL SALES 1.1 0.9 0.9 6.7 0.6 2.0 3.6 3.8 1.4 2.6 3.5 2.4 2.5

DOMESTIC FINAL SALES 1.3 4.3 2.6 3.2 0.5 1.1 3.4 3.6 1.9 2.1 3.2 2.9 2.1

NET EXPORTS (pct pt contr) -0.3 -3.5 -1.7 3.3 0.1 0.9 0.0 0.0 -0.5 0.4 0.2 -0.6 0.3

INVENTORIES (pct pt contr) 2.6 0.8 1.6 -3.4 1.3 0.4 -0.1 -0.3 1.4 0.0 0.0 -0.3 0.3

CONSUMPTION 1.9 2.2 2.4 4.0 2.2 0.5 3.2 3.2 1.7 2.4 3.1 2.6 2.3

BUSINESS FIXED INVESTMENT 7.8 17.2 10.0 7.7 2.0 6.9 8.9 11.3 5.7 7.3 8.2 10.6 7.2

STRUCTURES -17.8 -0.5 -3.6 7.7 -14.8 7.0 3.0 4.0 -13.7 -1.2 4.4 -4.0 -0.6

EQUIPMENT & SOFTWARE 20.5 24.8 15.4 7.7 8.7 7.0 11.0 14.0 15.3 10.5 9.5 16.9 10.2

RESIDENTIAL INVESTMENT -12.3 25.6 -27.3 3.3 -1.9 1.0 5.0 7.0 -3.0 -1.3 9.0 -4.6 2.7

EXPORTS 11.4 9.1 6.7 8.6 7.7 9.0 8.0 8.0 11.7 8.1 9.3 8.9 8.2

IMPORTS 11.2 33.5 16.8 -12.6 5.1 2.0 6.0 6.0 12.6 3.9 6.4 10.9 4.8

GOVERNMENT -1.6 3.9 3.9 -1.7 -5.8 0.1 1.5 0.9 1.0 -0.8 0.3 1.1 -0.9

INVENTORIES (ch $bil ar) 44 69 121 16 56 68 65 55 63 61 58 16 55

PI 1.3 -0.5 1.4 2.6 5.2 4.1 1.4 1.2 1.6 3.0 2.0 1.3 3.0

CORE CPI 0.0 0.8 1.1 0.6 1.7 2.5 2.1 1.6 1.0 1.6 2.0 0.7 2.0

ORE PCE PRICES 1.2 1.0 0.5 0.4 1.6 2.3 1.8 1.3 1.3 1.3 1.9 0.8 1.7

NEMPLOYMENT (%, level) 9.7 9.6 9.6 9.6 8.9 9.1 9.1 9.0 9.6 9.0 8.5 9.6 9.0

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 0.6 0.13 0.13

2-YEAR TREASURY 1.0 0.6 0.4 0.6 0.8 0.5 0.9 1.2 0.7 0.8 1.9 0.6 1.2

10-YEAR TREASURY 3.8 3.0 2.5 3.3 3.5 3.2 3.5 3.8 3.2 3.5 4.0 3.3 3.8

Source: Bureau of Economic Analysis, Bureau of Labor Statistics, US Treasury, Federal Reserve Board, and MF Global

FORECAST SUMMARY

As discussed on page 2, we continue to forecast that the recovery

will improve over time, although we have trimmed our growth

projections somewhat. We expect real GDP growth to average

3.5% at an annual rate from Q3 of 2011 through Q4 of 2012.

Growth averaged an estimated 2.7% annual rate in the first two

years of the recovery (including our 2.3% estimate for last

quarter).

The weakening in employment growth in May and June followed

a clear pickup in the first four months of the year. 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 Q2, the 9.2% level in June was down

from 9.6%, on average, in 10Q4, and 10.0% in 09Q4.

While we believe ample slack will keep inflation fairly tame, even

core inflation has moved higher this year. We expect the pace in

the core PCE price index to move up from 0.8% in 2010 to 1.7%

in both 2011 and 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) unemployment rate and still-tameinflation will likely allow the Fed to be patient in unwinding

stimulus; we forecast a still-low 1.0% funds rate at the end of

2012, with the first increase in June 2012. Some tightening in

2012 will likely also come via Fed balance sheet shrinkage; we

expect Fed officials to hold the balance sheet constant through

Q1 of next year. We expect Treasury yields will rise, with 10-year

yields up to 3.8% at the end of 2011 and 4.1% at the end of 2012.

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DATA PREVIEW

TREASURY INTERNATIONAL CAPITAL SYSTEM (MON, JUL 18, 09:00)billions of dollars, nsa FEB MAR APR MAY

TOTAL NET INFLOWS 83.4 127.1 68.2

NET LONG-TERM SECURITIES 27.2 24.0 30.6

NET FOREIGN, US RESIDENTS* -5.5 -30.7 -14.2

NET BY NON-US RESIDENTS 32.6 54.7 44.8

TREASURY BONDS & NOTES 30.6 26.8 23.3

PRIVATE 14.7 19.9 -1.0

OFFICIAL 15.9 6.8 24.4

GOVT AGENCY BONDS -1.5 9.5 7.5

PRIVATE -7.3 6.9 5.8

OFFICIAL 5.8 2.6 1.7

CORPORATE BONDS -2.5 3.8 -3.8

PRIVATE -1.6 3.2 -2.8

OFFICIAL -0.9 0.5 -1.0

EQUITIES 6.1 14.7 17.8

PRIVATE 6.6 14.8 16.6

OFFICIAL -0.5 -0.1 1.2

OTHER LONG-TERM SECURITIES -11.1 -12.3 -11.7

SHORT-TERM SECURITIES -1.8 -18.3 -8.0

TREASURY BILLS -9.3 -21.9 -13.4

CHANGE IN BANKS' NET

LIABILITIES69.2 133.7 57.4

*Negative sign for outflow. Source: Treasury Department

Net inflows into long-term U.S. securities have averaged $34.3

billion per month so far in 2011, down from $65.2 billion, on

average, in 2010. Much of the dropoff has been in long-term

Treasury securities: to $31.8 billion per month so far this year

from $58.8 billion, on average, last year. Consistent with that

pattern, long-term Treasury yields rose in Q1. However, yields

began to fall in April and then dropped sharply in May.

HOUSING MARKET INDEX (HMI) (MON, JUL 18, 10:00)

JUL EST

APR MAY JUN CONS MF

HOUSING MARKET INDEX 16 16 13 14 14

CURRENT SALES 15 15 13

EXPECTED SALES 22 19 15

HOMEBUYER TRAFFIC 13 14 12

Source: National Association of Homebuilders, Bloomberg, and MF Global

The housing market index (HMI) had been at either 16 or 17 in

each of the seven months prior to the drop to 13 in June. We

expect at least some of that weakening will be reversed in the

upcoming report. The S&P 500 homebuilding index fell in early

June but has risen, on balance, since then.

The trend-setting housing market index has been close to flat at

a low level since early 2009, although it fell a bit more in last

months report.

Source: Bureau of the Census and National Association of Home Builders

The homebuilder portion of the S&P 500 is up, on balance, since

early June.

Source: Standard & Poors and National Association of Home Builders

4

22

40

58

76

250

550

850

1150

1450

03 04 05 06 07 08 09 10 11 12

New single-family home sales (l)

Housing market index (r)

000s, saar index, sa

MayJun

080101 090101 100101 110101

100

200

300

400

500

08 09 10 11

7

12

17

22

27

Housing market index (r)

S&P 500: homebuilding index (l)

ind ex, both scales

Jun

Jul 14

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WEEKLY STORE SALES (TUE, JUL 19, 07:45/08:55)

JUN 25 JUL 2 JUL 9 JUL 16

WEEKLY ICSC,

%w/w, sa2.9 1.5 0.4

WEEKLY ICSC, %y/y 3.0 3.5 5.5

REDBOOK, %y/y 2.5 5.2 5.4

MAY JUNJUL THRU

9JUL THRU

16

WEEKLY ICSC,

%m/m, sa-2.3 0.1 2.9

REDBOOK, %m/m, sa -2.7 0.9 0.6

MONTHLY ICSC,

%m/m, sa-2.6 1.8

WEEKLY ICSC, %y/y 3.0 2.7 5.5

REDBOOK, %y/y 3.9 3.8 5.4

MONTHLY ICSC,

%y/y5.4 6.9

Note: monthly data are based on the retail industry's fiscal calendar, the fiscal monthof July ends on July 30.Source: International Council of Shopping Centers, Instinet, and MF Global

Both weekly store sales have accelerated in recent weeks,

consistent with spending power being boosted by a reversal of

some of the recent surge in gasoline prices. However, such a

pickup was not evident in the June retail sales report, which

showed sales excluding autos, gasoline, and building materials

up just 0.1% m/m after 0.2% m/m in May.

HOUSING STARTS AND PERMITS (TUE, JUL 19, 08:30)JUN EST

000s, saar MAR APR MAY CONS MF

STARTS 593 541 560 575 560

SINGLE-FAMILY 418 404 419

MULTIFAMILY 175 137 141

PERMITS 574 563 609 597 575

SINGLE-FAMILY 392 395 406

MULTIFAMILY 182 168 203

Source: Census Bureau, Bloomberg, and MF GlobalStarts rose in January (20.9% m/m), fell in February (-18.6%

m/m), rose in March (14.5% m/m), fell in April (-8.8% m/m), and

then rose in May (3.5% m/m). Through the volatility, the trend still

looks roughly flat. Starts averaged a 570,000-unit annual rate in

the first five months of this year, up marginally from the 562,000-

unit pace in the second half of 2010. Permits also averaged a

570,000-unit pace in the first five months of the year, down

marginally from 577,000 in the second half of last year.

The recovery in starts has been and probably will continue to be

restrained by still-high inventories of vacant existing homes; we

estimate the excess is currently just under three million homes

(based on the differential with the average vacancy rate in the

1990s). Those inventories are likely to trend lower in coming

quarters. The current trend in starts is probably close to one

million (at an annual rate) below the long-term trend based on

household formation and replacement building. The lack ofdecline through Q2 of last year, despite that arithmetic, reflected

what appeared to be a largely cyclical slowing in household

formation (consistent with weakness in the labor market). While

the data have been volatile, household formation shows a net

pickup since mid-2010. In turn, housing vacancies excluding

seasonal use homes show a net decline of 150,000 in the last

three quarters. We expect the rate of decline to pick up

significantly in coming quarters.

Housing starts have shown little net change since early 2009.

Source: Census Bureau

MORTGAGE APPLICATIONS (WED, JUL 20, 07:00)

MBA indexesPURCHASE

INDEXREFI INDEX 30-YEAR

MORTGAGERATE %WKLY

4-WKAVG

WKLY 4-WK AVG

JUN 17 185.8 187.8 2675.2 2619.4 4.57

JUN 24 180.3 185.0 2604.4 2659.8 4.46

JUL 1 188.9 186.5 2363.6 2631.7 4.69

JUL 8 183.9 184.7 2217.3 2465.1 4.55

JUL 15

Source: Mortgage Bankers' Association

The purchase index continues to show little net change,

consistent with a near-flat trend in home sales. It averaged 189.4

in Q2 following 186.4 in Q1.

400

900

1400

1900

2400

05 06 07 08 09 10 11

Housing starts Housing permits

000s, saar

May

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10/13



EXISTING HOME SALES (WED, JUL 20, 10:00)JUN EST

MAR APR MAY CONS MF

TOTAL (000s, saar) 5090 5000 4810 4950 4810

%m/m 3.5 -1.8 -3.8 2.9 0.0

%y/y -6.4 -13.8 -15.3 -8.0

MONTHS' SUPPLY 8.3 9.0 9.3

MEDIAN PRICE (%y/y) -5.8 -6.5 -4.6

Source: National Association of Realtors, Bloomberg, and MF GlobalAfter rising in March, existing home sales fell in April and May.

Through the volatility, the trend continues to look close to flat. Our

4.810 million-unit-pace forecast for June is down marginally from

the 4.908 million total for 2010.

The level of existing home sales is still down sharply from theannual peak of 7.076 million in 2005. Moreover, post-2007 data

are likely to be revised down soon (probably next month) 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

JOBLESS CLAIMS (THU, JUL 21, 08:30)

NEW CLAIMS (000s, sa) CONTINUING CLAIMS (000s)

WKLY4-WKAVG

REGULAR EXTENDED* TOTA

sa nsa sa** sa**

JUN 11 420 426 3714 3935 4186 7900

JUN 18*** 429 426 3724 3847 4079 7803

JUN 25 432 428 3712 3831 3999 7711

JUL 2 427 427 3727

JUL 9 405 423

JUL 16*** CONS 410 418

MF 405 417

*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

The 405,000 reading for new claims in the latest report was down

sharply from 427,000, on average, in the prior four weeks.

Moreover, the latest reading included an 11,500 boost from

temporary furloughs of state workers in Minnesota (related to a

budget dispute). Unfortunately, the claims data are especially

volatile and unreliable in early July (including the period covered

by the upcoming report), reflecting seasonal adjustment

challenges related to annual summer shutdowns in the auto

industry. While we expect claims to trend lower this quarter, we

caution against extrapolating yet.

Jobless claims may be starting to decline again.

Source: Department of Labor and MF Global

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)

ind ex, sa 000s, saar

May

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

Jul 9

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11/13



Along with new claims for unemployment benefits, the total

number receiving unemployment benefits may be starting to

signal some improvement again. (See regular +

emergency/extended continuing claims series in the chart

below.)

Note: extended claims are seasonally adjusted using seasonal factors for regularcontinuing claims.Source: Department of Labor and MF Global

FHFA HOUSE PRICE INDEX (THU, JUL 21, 10:00)MAY EST

FEB MAR APR CONS MF

PURCHASE-ONLY INDEX

%m/m, sa -1.5 -0.4 0.8 0.1 0.0%m/m, nsa -1.0 -0.3 1.8 0.5%y/y -5.6 -6.2 -5.7 -6.1

Source: Federal Housing Finance Agency, Bloomberg, and MF Global

Home price indexes may be starting to stabilize after several

months of declines.

Home price indexes have weakened over the past year,

although they had risen in the prior year and net changes since

mid-2009 have generally been modest. Prices may be starting to

stabilize.

*FHFA and S&P/Case Shiller through April; Radar Logic through mid-May;CoreLogic through May.Source: CoreLogic, Federal Housing Finance Agency, Standard & Poor's, Fiserv,MacroMarkets LLC, and Radar Logic

The weakening in home prices recently has been concentrated

in distressed-sale homes.

Source: CoreLogic

61

72

83

94

105

06 07 08 09 10 11

FHFA ho use 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

Apr/May*

130

150

170

190

210

05 06 07 08 09 10 11 12

CoreLogic home price index: total

CoreLogic home price index: excluding distressed sales

index, January 2000=100, nsa

May

J J J J J J J J

2

5

8

11

14

17

2

5

8

11

14

17

Jan-08 Aug-08 Mar-09 Oc t-09 May-10 Dec-10 Jul-11

Regular continuing claimsRegular + emergency/federal extended continuing claimsTotal unemployed in employment report

millions, sa

Jun

Jul 2

Jun 25

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LEADING INDICATORS (THU, JUL 21, 10:00)JUN EST

MAR APR MAY CONS MF

LEADING INDEX(%m/m, sa) 0.7 -0.4 0.8 0.2 0.3

%y/y 5.2 4.8 5.2 5.7

COINCIDENTINDEX (%m/m, sa)

0.2 0.1 0.1 0.1

%y/y 2.4 2.0 1.8 1.7

Source: Conference Board, Bloomberg, and MF Global

The index of leading indicators appears to have risen modestly in

June, with boosts from the yield curve and money supply more

than offsetting drags from the stock market, housing permits, and

consumer expectations components.

PHILADELPHIA FED MANUFACTURING SURVEY (THU, JUL 21, 10:00)JUL EST

indexes, sa APR MAY JUN CONS MF

CURRENT ACTIVITY 18.5 3.9 -7.7 2.0 2.0

NEW ORDERS 18.8 5.4 -7.6

EMPLOYMENT 12.3 22.1 4.1

PRICES PAID 57.1 48.3 26.8

PRICES RECEIVED 27.5 16.8 4.4

6-MONTH OUTLOOK 33.6 16.6 2.5

6-MONTH CAPEX PLANS 20.0 23.1 12.9

Source: Federal Reserve Bank of Philadelphia, Bloomberg, and MF Global

The national ISM index showed improvement in June, in contrast

to the sharp weakening in the New York and Philadelphia Fed

surveys. To some extent, the contrast may have reflected

momentum turning from negative to positive during the month

since the sample cutoff point came later in the ISM survey than in

the New York and Philadelphia Fed surveys. Meanwhile, the New

York survey showed only a slight fading of weakness in early

July, with the current activity index rising to -3.7 from -7.8 in June.

We expect the Philadelphia Fed report to show a bit more

improvement, with more help from a rebound in auto production

than in the New York Fed survey.

FED BALANCE SHEET (THU, JUL 21, 16:30)

billions of dollars unless noted, nsa JUN 29 JUL 6 JUL 13 JUL 20

TOTAL FED ASSETS 2869 2874 2882

%y/y 22.9 23.1 22.9

SECURITIES HELD OUTRIGHT 2643 2648 2654

US TREASURIES 1617 1625 1630

FEDERAL AGENCY 117 115 115

MORTGAGE-BACKED 909 909 909

OTHER LOANS 13 13 13

PRIMARY CREDIT 0 0 0

TALF 13 12 12

MAIDEN LANE LLC (I*, II**, &

III***)61 60 60

CENTRAL BANK LIQY SWAPS 0 0 0

OTHER ASSETS 153 153 155

MONETARY BASE (2-wk avg) 2629 2694 2694

% y/y 31.9 34.8 34.8

* Bear Stearns assets. ** AIG CDO assets. *** RMBS assets.Source: Federal Reserve Board

Fed officials have been assuming that every $200 billion increase

in total Fed assets provides stimulus equivalent to 25 bps on the

funds rate. Based on that arithmetic, the $2 trillion increase since

2008 has provided stimulus equivalent to around 250 bps on the

funds rate. (See our Taylor Rule analysis in the June 24, 2011

issue.)

MONETARY AGGREGATES (THU, JUL 21, 16:30)

JUN 20 JUN 27 JUL 4 JUL 1

M1 (billions of $, saar) 1940 1949 1998

%ch from 13 weeks ago, saar 10.9 10.3 21.8

%y/y 12.4 12.3 15.9

M2 (billions of $, saar) 9088 9165 9253

%ch from 13 weeks ago, saar 8.0 11.7 14.8

%y/y 5.7 6.3 7.9

Source: Federal Reserve Board

At 7.9%, the y/y change in M2 is up sharply from 4.3% in Q1 and2.3% in all of 2010. The recent acceleration has reflected

renewed inflows into money market funds and a pickup in inflows

into demand and savings deposits. To some extent, the pattern

likely reflects increased risk aversion.

8/6/2019 MfM Jul 15 2011

13/13



July 11Aug 5MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY

11

(11:00) Fed purchase op(11:00) 4-wk BillAnnouncement(11:30) 3- & 6-mth Bill Auction

12

(07:30) Jun NFIB(07:45/08:55) Store Sales(08:30) May Foreign Trade(10:00) Jul IBD/TIPP(10:00) May JOLTS(11:30) 4-wk Bill Auction(13:00) 3-yr Note Auction(14:00) FOMC Minutes

13

(07:00) Mortgage Apps(08:30) Jun Imp Prices(09:10) Boston FedsRosengren(10:00) Fed ChairmanBernanke to deliver semi-annual monetary policyreport testimony to theHouse Financial ServicesCommittee(13:00) 10-yr (r) Note Auction(13:20) Dallas Feds Fisher(14:00) Jun Budget(14:00) Month-aheadTreasury purchase opschedule from NY Fed

14

(08:30) Initial Claims(08:30) Jun Retail Sales(08:30) Jun PPI(10:00) May Inventories(10:00) Fed ChairmanBernanke to deliver semi-annual monetary policyreport testimony to theSenate Banking Committee(11:00) 3- & 6-mth Bill and 10-yr TIPS Announcement(13:00) 30-yr (r) Bond Auction

15

(08:30) Jun CPI(08:30) Jul NY Fed(09:15) Jun Indust Prod(09:55) Jul prelim Michigan(11:00) Fed purchase op

18

(09:00) May TICS(10:00) Jul NAHB HMI 14e(11:00) 4-wk BillAnnouncement(11:30) 3- & 6-mth Bill Auction

19

(07:45/08:55) Store Sales(08:30) Jun Starts/Permits

Starts 560KePermits 575Ke

(11:00) Fed purchase op(11:30) 4-wk Bill Auction(14:00) Discount RateMinutes(19:30) KC Feds Hoenig

20

(07:00) Mortgage Apps(10:00) Jun Exist Home Sales

4810Ke/0.0%m/m

21

(08:30) Initial Claims 405Ke(08:30) Chicago Feds Evans(10:00) May FHFA 0.0%e(10:00) Jun Lead Ind 0.3%e(10:00) Jul Phil Fed 2.0e(10:00) Fed ChairmanBernanke testifies onEnhanced Oversight afterthe Financial Crisis(11:00) 3- & 6-mth, & 1-yr Bill,and 2-yr, 5-yr, & 7-yr NoteAnnouncement(13:00) 10-yr TIPS Auction

22

(11:00) Fed purchase op

25

(10:30) Jul Texas Mfg.(11:00) 4-wk BillAnnouncement(11:30) 3- & 6-mth Bill Auction

26

(07:45/08:55) Store Sales(09:00) May S&P/CS(10:00) Jul Cons. Cof.(10:00) Jul Richmond Fed(10:00) Jun New Home Sales(11:00) Fed purchase op(11:30) 4-wk and 1-yr BillAuction(13:00) 2-yr Note Auction

27

(07:00) Mortgage Apps(08:30) Jun Durables(13:00) 5-yr Note Auction(14:00) Beige Book

28

(08:30) Initial Claims(10:00) Jun PHSI(11:00) Jul KC Fed(11:00) 3- & 6-mth BillAnnouncement(13:00) 7-yr Note Auction(12:45) Richmond Feds Lacker(14:30) SF Feds Williams

29

(08:30) Q2 GDP (1st

est),including annual revision(08:30) Q2 ECI(09:45) Jul Chicago PMI(09:55) Jul Michigan(10:00) Jul Milwaukee PMI(10:00) Q2 HousingVacancies(11:00) Fed purchase op(15:15) Atlanta Feds Lockhartand St. Louis Feds Bullard

1(10:00) Jun Construction(10:00) Jul Mfg ISM(10:00) Jul Help Wanted(11:00) 4-wk BillAnnouncement(11:30) 3- & 6-mth Bill Auction

2(07:45/08:55) Store Sales(08:30) Jun Personal Income,including annual revision(11:30) 4-wk Bill Auction

Jul Lt Vehicle Sales

3(07:00) Mortgage Apps(08:15) Jul ADP(08:30) Jul NonMfg ISM(10:00) Jun Factory Orders

4(08:30) Initial Claims(11:00) Fed purchase op(11:00) 3- & 6-mth BillAnnouncement

Jul Chain Store Sales

5(08:30) Jul Employment(15:00) Jun 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

of any offer to buy a security, nor does it take into consideration the financial status, investment objectives or financial experience of any particular recipient. Because MF Global provides such information a

part of a general information service and without regard to an investors particular circumstances, neither it nor its subsidiaries and/or affiliates shall be liable for any loss or damages arising directly or

indirectly out of any inaccuracy in the market letter or the use of such information. Copyright by MF Global Inc. (2011) 717 Fifth Avenue New York, NY 10022. MF Global Inc. is a registered futures

commission merchant, a member of the NFA, and a registered broker-dealer and member of the CBOE, FINRA, NYSE, and SIPC.

mfm jul 15 2011

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