An uptick in the unemployment rate has Wall Street calling for the Fed
to lower rates by a half-point.
By Paul R. La Monica, CNNMoney.com editor at large
January 4 2008: 12:27 PM EST
NEW YORK (CNNMoney.com ) -- With unemployment rising to 5 percent in
December and jobs growth coming in well below forecasts, economists
said the Federal Reserve may be forced to slash interest rates when it
meets later this month in order to stave off a recession.
In another step to combat the slowing economy, the Fed also announced
Friday that it was going to lend up to $60 billion more to banks in
two auctions later this month and that it would decide by February 1
if it will conduct more auctions. The auctions are part of a plan the
Fed announced in December to to try and restore order to the
distressed financial markets.
The government reported December employment figures on Friday. Only
18,000 jobs were added to the nation's payrolls while economists were
predicting job growth of 70,000. What's more, the unemployment rate
was expected to come in at 4.8 percent, up from 4.7 percent in
November.
As a result of these gloomy numbers, expectations for a half-point
rate cut grew Friday morning. According to futures listed on the
Chicago Board of Trade, investors are pricing in a 78 percent chance
that the Fed will lower the federal funds rates by 50 basis points, to
3.75 percent, at the conclusion of its two-day meeting on January 30.
There are 100 basis points in a full percentage point.
"The jobs numbers make a half point cut plausible," said Keith Hembre,
chief economist with First American Funds in Minneapolis. "The
unemployment rate has moved up to 5 percent from 4.4 percent last
March and we've usually not had an upward movement of that magnitude
outside of a recession."
Prior to the jobs report, investors were pricing in a 67 percent
chance of a half-point cut as recession fears have grown in recent
days. A report released Wednesday indicated that manufacturing
activity is softening while oil prices, which hit $100 this week, have
raised concerns that consumers may pull back on spending as a result
of higher energy prices.
The Fed last cut the federal funds rate, a key overnight bank lending
rate that affects rates for credit card debt, home equity lines of
credit and auto loans, by a quarter-point to 4.25 percent on Dec. 11.
In the minutes from that meeting, released on Wednesday, the Fed
hinted that more "substantial" rate cuts might be needed if the
economy continued to show signs of weakness in the face of the credit
crunch caused by last year's subprime mortgage meltdown.
John Lynch, chief market analyst for Evergreen Investments in
Charlotte said that he thinks the Fed will now lower rates to at least
3.5 percent by mid-year. He said that despite the spike in oil and
other commodities such as gold, the Fed would probably be more
comfortable with inflation picking up a bit if it meant that the
economy did not go into recession.
With the economy showing so many signs of sluggishness, it's going to
be tough for the Fed to argue that inflation is the bigger bugaboo.
"There is no debate with the latest round of numbers. Everything
points to a significantly slower economy," said Joe Balestrino, fixed
income market strategist with Federated Investors in Pittsburgh.
Still, more rate cuts have the potential to lift oil and other
commodity prices further since lower rates likely would further weaken
the dollar. With that in mind, there are concerns that the Fed may not
be as aggressive as Wall Street wants it to be.
"$100 oil is an unusual factor," Hembre said. "While it doesn't
completely change inflation expectations it does complicate things a
bit."
Nonetheless, investors are also worried that more rate cuts from the
Fed may be too late to save the economy from dipping into a recession.
"A 50 point cut might not make that much difference in stopping a free
fall if that is happening," said Oscar Gonzalez, economist with John
Hancock Financial Services in Boston.
Gonzalez cautions that he thinks it's still too soon to say that the
"sky is falling." But he would be worried if the jobs numbers for
January are as bad as they were for December.
"If employment continues to weaken, we could be in for a very rough
patch of economic news for at least the next few quarters," Gonzalez
said.
Despite the weak numbers, economists said they did not think the Fed
would hold an emergency meeting before Jan. 30 to talk about cutting
rates.
Hembre said that it would take a "calamity" such as much weaker than
expected retail sales figures for December or a lot more volatility in
the stock and bond markets to justify an intermeeting move.
Stocks did not react well to the jobs news, with the Dow falling more
than 140 points, or 1.1 percent in early afternoon trading and the S&P
500 off by about 1.4 percent .The Nasdaq plunged more than 2.3
percent.
Bonds continued to rally, sending the yield on the benchmark 10-Year
U.S. Treasury down to 3.85 percent. Bond prices and yields move in
opposite directions and lower yields are typical during a sluggish
economic environment.
But Gonzalez suggested that a rate cut before Jan. 30 might actually
cause stocks and bond yields to fall further since it could be
construed as a sign of desperation by the Fed.
"An intermeeting move would be a cause for alarm," he said.
Instead, Gonzalez thinks the Fed is more likely to use creative ways
to try to restore confidence in the markets and economy, such as the
Term Auction Facility it announced last month in conjunction with
central banks in Canada and Europe.
The Fed devised this proposal in order to encourage banks that need
cash to ask for money without having to borrow directly from the Fed
at the discount rate, which is higher than the federal funds rate.
The central bank has already loaned a combined $40 billion to
financial institutions during two auctions last month. There was
strong demand for these auctions and in both cases, the rates for the
loans were below the discount rate of 4.75 percent.
The Fed said Friday it would hold its next auction, of up to $30
billion, on January 14 and that another auction of up to $30 billion
would take place on January 28.
Balestrino is cautiously optimistic that a half-point cut, combined
with the Fed's three rate cuts in 2007, could keep the economy from
heading into a recession.
He adds that if the economy continues to slow in the next few months,
the Fed could lower rates by a half-point at its March 18 meeting, or
even at an unscheduled meeting in February
==================
Steve Schaefer, 01.04.08 , 4:25 PM ET
A massive sell-off followed Friday morning's U.S. jobs report, and continued virtually unabated throughout the day.
Wall Street closed near session lows, with the Dow Jones industrial average down 257 points, or 2.0% , at 12,800. The broader Standard & Poor's 500 fell 36 points, or 2.5%, to 1,412, and the tech-driven Nasdaq lagged even further behind, losing 98 points, or 3.8%, to 2,505.
President Bush said financial markets remain strong and solid after meeting with a group that included Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. Bush's optimistic outlook was not shared by investors on Wall Street, as recession fears surged back to the fore thanks to the disastrous December jobs report that said nonfarm payrolls added just 18,000 jobs and unemployment ticked up to 5%.
The Federal Reserve is widely expected to take another whack at interest rates to stave off a U.S. recession when it meets January 29 and 30. Goldman Sachs and JPMorgan Chase are predicting a 50 basis point cut at the January meeting.
General Motors made a recovery Friday afternoon, clawing its way back toward positive territory after terminating a $4.1 billion revolving credit facility, according to an SEC filing. The move, made after carmaker determined the credit facility is not necessary to maintain sufficient liquidity and financial flexibility to meet capital requirements for the first half of 2008, was interpreted as a positive by investors. Shares broke through briefly, but were back down 1% just before the close, still well off the day's lowest levels when the stock fell 4%.
The No. 2 U.S. automaker, Ford Motor, was down almost 5% Friday. Thursday saw Ford's weak December sales push it to third place in U.S. auto sales for 2007, surpassed by Toyota for the first time.
Meanwhile, chipmaker Intel was the scapegoat for the woes of the tech sector. After semiconductor stocks were slapped with downgrades by Banc of America on Wednesday, Intel was hit again Friday when JPMorgan cut its rating on the stock to "neutral" from "overweight." Shares of Intel dove more than 8%, and were followed lower by nearly every big name in the tech sector.
Microsoft saw shares fall nearly 3%, search giant Google was off about 4%, and Apple fell more than 7%.
The major banks and brokers were all well in negative territory, but Bear Stearns was in perhaps the worst shape. The brokerage saw shares fall 6%, after reports U.S. prosecutors in Brooklyn are revving up a probe into the collapse of two Bear hedge funds over the summer. The funds in question invested heavily in collateralized debt obligations backed by subprime mortgages prior to the subprime meltdown. The probe is expected to focus on officials in charge of the funds, and any indictments could prove disastrous for Bear Stearns.
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