Recession a big worry but not likely: Moody's

U.S. government bond ratings should remain stable thanks to modest federal debt levels, the credit rating agency says.

Despite the subprime mortgage crisis and the rising risk of a recession, a recession isn't likely under current conditions, credit ratings agency Moody's said in a report Friday.

The diversity of the U.S. economy and the global role of the dollar continue to support U.S. government bond and foreign currency ratings, according to the rating agency's annual U.S. credit analysis.

The dollar is expected to contribute positively to economic growth in 2008 as its declining value increases the value of U.S. assets abroad. But in 2007, due to a temporary slowing of the economy in the first quarter and an expected slowdown in the fourth, annual GDP growth is now estimated at 2 percent, down from 3.3 percent in 2006, Moody's reported.

And the 2008 outlook is far from rosy.

Slower employment growth, housing sector problems and subprime worries will continue to subdue overall growth, with housing having the biggest impact. In 2008, the risk of an outright recession appears to be increasing, although this is not yet the mainstream scenario. Moody's said. If home prices, consumer confidence and spending do continue to sink, the economy could see negative growth in the first half of 2008.
Recession may already be here

Construction is slowing and home prices are falling. This means that not only will residential construction be falling, directly affecting GDP growth, but the wealth effect of lower house prices is likely to lead to a drop in consumption growth.

It is expected that, despite federal government efforts to convince lenders to freeze interest rates on some mortgages where they are set to increase, home foreclosures will rise in 2008, further exacerbating the problem, the agency added.

U.S. government bond ratings should remain stable however, thanks to modest federal debt levels.

The United States reported a smaller than expected federal deficit, at $248 billion, or 1.2 percent of GDP, for the fiscal year ending Sept. 30, considerably less than the 1.9 percent of GDP previously estimated.

And despite the projected deficits for the next few years, Moody's believes that U.S. government debt levels in relationship to the size of the overall economy will remain consistent with its Aaa rating.

Fed Signals Shift as Traders Anticipate Deeper Rate Reductions

Federal Reserve officials signaled they've shifted their stance in favor of taking out greater insurance against the growing risk of recession.

Fed Governor Frederic Mishkin said today that policy makers must be ready to abandon inertia and act decisively in cases of major financial disruptions. Philadelphia Fed Bank President Charles Plosser, whom economists consider to be the toughest on inflation, said he's now most concerned about consumer spending.

The comments, following Chairman Ben S. Bernanke's speech yesterday pledging substantive additional action, spurred traders to predict a faster and deeper pace of interest-rate cuts. That strategy would be a break from the forecast-driven policy approach to date, Fed watchers said. Mishkin joined Bernanke in stating the strategy is now one of insurance.

I am delighted the Fed is moving in a very different direction, said former Fed governor Lyle Gramley, now a senior adviser at the Stanford Group in Washington. Risk-management is what they should be doing.

Mishkin, 57, a former collaborator with Bernanke on academic research, said in New York today that waiting too long to ease policy could result in further deterioration of the macroeconomy and might well increase the overall amount of easing that would eventually be needed.

Disappointing Markets

While the Fed cut the benchmark rate by a half-point, more than anticipated in September, officials have since disappointed some investors by refusing to commit to a series of reductions. When lowering borrowing costs in October and December by a quarter-point each, policy makers refrained from saying that growth was a bigger concern than inflation.

By the time they met Dec. 11, officials acknowledged that the Fed's stance appeared to be somewhat restrictive, minutes of the session showed last week.

They underestimated the magnitude of the credit shock, said Brian Sack, senior economist at Macroeconomic Advisers LLC in Washington. The markets got it a lot faster than the Fed and now they are catching up.

Plosser, 59, said he's certainly open to more rate cuts, in an interview with PBS's Nightly Business Report today. By contrast, when he spoke Nov. 27 he warned that the Fed's rate cut the previous month posed a risk to inflation expectations.

The most thing we are concerned about right now is consumer spending, Plosser said today.

Boston Fed President Eric Rosengren, 50, said today in South Burlington, Vermont that declining house prices are likely to dampen consumer and business confidence in spending.

`Gasoline on the Fire'

Rosengren, Plosser and especially Mishkin arguably poured more gasoline on the fire after Bernanke's remarks, Ian Morris, chief economist at HSBC Securities USA Inc., said in a note to clients. The market is betting that the Fed may cut in an inter-meeting move, wrote Morris, who yesterday doubled his rate-cut call for this month to a half-point.

Traders anticipate at least a half-point reduction in the target rate for overnight loans between banks this month, according to contracts quoted on the Chicago Board of Trade.

Odds of 0.75 percentage point of reductions this month jumped to 34 percent, from zero yesterday, futures show. That suggests some investors see the chance of a move before the Federal Open Market Committee meets Jan. 29-30, with an additional cut when it gathers.

Bernanke's Opportunity

Bernanke, 54, will have another opportunity to send signals on rates Jan. 17, when he testifies on the economic outlook before the House Budget Committee.

This week's shift may have been driven by the Labor Department's Jan. 4 report showing the jobless rate jumped to 5 percent in December, economists said. The figures also showed the first decline in private-sector employment since 2003.

We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks, the Fed chief said to the Women in Housing and Finance and Exchequer Club in Washington. The committee must remain exceptionally alert and flexible.

Jump in U.S. Jobless Rate Always Signaled Recessions

The U.S. economy may be on the verge of -- or already in -- a recession, based on the increase in 2007's unemployment rate, economists said.

The jobless rate rose to 5 percent in December, the highest in two years. The figure was 0.6 percentage point higher than March's 4.4 percent, which was the lowest reading of the expansion that began at the end of 2001.

Since 1949 the unemployment rate has never risen by this magnitude without the economy being in recession, John Ryding, chief U.S. economist at Bear Stearns Cos. in New York, said in a note to clients. We now put ourselves on recession watch.

Before the start of the last contraction in March 2001, the unemployment rate rose just 0.4 percentage point, according to Labor Department figures. The rate barely rose at all ahead of the 1990-91 downturn, one reason why economists consider it a so-called lagging signal.

The National Bureau of Economic Research, which determines when recessions begin and end, defines them as a significant decrease in activity over a sustained period of time. The declines would be visible in gross domestic product, payrolls, production, sales and incomes.

The increase in the jobless rate is disturbing indeed, Victor Zarnowitz, 88, a senior fellow at the New York-based Conference Board and a member of the NBER group that dates contractions, said in an interview. A lot of people would rule out that a recession is pending. I would not. It's too early to say and it's perhaps not very likely that it will come, but I would not rule it out.

Economy Changing

The reason other indicators, such as sales or payrolls, have yet to unequivocally signal a downturn has begun is because the U.S. economy has undergone significant structural changes, said Allen Sinai, chief global economist for Decision Economics in New York.

The economy managed to eke out an 18,000 gain in payrolls last month thanks, in part, to increases in hiring by health care companies and restaurants, said Sinai.

An ageing population with an increasing propensity to eat away from home suggests those two categories could continue to add jobs in coming months, preventing payrolls from sending the telltale recession message, he said.

There is no doubt in my mind that we are into a recession-like economy, said Sinai in an interview. The technical definition of a recession may be out of date because the make-up of the economy has changed.

Consumer Spending

Another key area that has yet to issue any alarms is consumer spending, which accounts for more than two thirds of the economy. Spending figures in November were stronger than forecast even as gasoline hovered around $3 a gallon and property values slumped.

That leaves the onus on December retail sales figures, due from the Commerce Department on Jan. 15, to determine whether the American consumer will indeed falter.

We are spooked by this week's data and very open to a much weaker economic scenario, Stephen Stanley, chief U.S. economist at RBS Greenwich Capital Markets in Greenwich, Connecticut, said in a note. A collapse in consumer spending last month would prompt him to carve up our forecasts for 2008 and start over with much weaker growth estimates, he said.

Today's jobs report also showed more industries were cutting payrolls than increased hiring last month. The so-called diffusion index dropped below 50, signaling contraction, for the first time since September 2003.

It's not a good situation, said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. It is certainly true that every time the unemployment rate has done what it did today, we are in a recession.

Still, I don't want to forecast a recession, he said, I would prefer for the National Bureau of Economic Research to call it a recession.

Source - Bloomberg

U.S. Stocks Fall After Job Growth Misses Forecast

The U.S. stock market got off to its worst start since 2000 after government reports on jobs and manufacturing added to concern the economy will sink into recession.

Apple Inc., maker of the iPod music player, fell the most since April 2005 and was the biggest drag on the Standard & Poor's 500 Index. Apple declined after Intel Corp., the largest chipmaker, was downgraded by JPMorgan Chase & Co. Alcoa Inc., Home Depot Inc. and Hewlett-Packard Co. led the Dow Jones Industrial Average to its third retreat in four days.

The economy's clearly downshifting rapidly, said James Swanson, chief investment strategist at MFS Investment Management in Boston, which oversees $204 billion. For equities it means some turbulence ahead.

The S&P 500 slipped 35.53, or 2.5 percent, to 1,411.63, bringing its three-day loss to 3.9 percent, the most since it fell 4.6 percent to start 2000 and wiping out its gain from last year. The Dow average decreased 256.54, or 2 percent, to 12,800.18, marking its worst start since 1904. Ten shares declined for every one that rose on the New York Stock Exchange.

Computer-related shares dropped the most, dragging the Nasdaq down 98.03, or 3.8 percent, to 2,504.65. The 5.6 percent decline so far this year is the worst start since the electronic market opened in 1971. An index of computer companies in the S&P 500 fell the most in five years.

Apple, Intel Drop

Apple, the biggest gainer among technology stocks in the S&P 500 last year, lost 7.6 percent to $180.05. Intel dropped 8.1 percent to $22.67, the lowest since June. Research In Motion Ltd., maker of the BlackBerry e-mail device, slumped 8.4 percent to $103.35.

Chain stores and discounters in the S&P 500 declined 3.9 percent, their seventh straight retreat. Bed Bath & Beyond Inc., the largest U.S. home furnishings retailer, fell to a six-year low.

An index of stocks with the biggest hedge fund ownership posted its steepest drop in five months. The Goldman Sachs GSTHHVIP Basket fell 2.9 percent, the most since Aug. 9, when the world's largest securities company said its North American Equity Opportunities Fund sold holdings after losing 15 percent.

U.S. payrolls grew by 18,000 last month, about one-quarter the rate forecast by economists, and unemployment jumped to a two-year high of 5 percent. On Jan. 2, the Institute for Supply Management's manufacturing index had its steepest drop in five years, falling to 47.7 for December.

`Cast Some Doubt'

The one thing that people have pinned their hopes on about avoiding a recession was that the labor market continued to be pretty strong, said Daniel Manion, manager of the $1.4 billion Sentinel Common Stock Fund in Montpelier, Vermont. This number really starts to cast some doubt on that.

Two-year Treasury note yields dropped to the lowest since November 2004 on speculation the Federal Reserve will cut borrowing costs. The dollar touched a one-month low against the euro and yen.

Alcoa, the world's second-largest aluminum company, fell $1.32 to $34.87. Home Depot, the largest home-improvement retailer, fell 86 cents to $24.96, an almost five-year low. Hewlett-Packard, the No. 1 personal computer maker, slipped $2.78 to $46.87.

Intel was lowered to neutral from overweight by JPMorgan Chase & Co. A slowdown in order rates from the personal- computer market may result in downside to estimates in the first half of 2008, analysts including Christopher Danely wrote in a note today.

Most Since 2004

Semiconductor shares in the S&P 500 lost 6.3 percent, the most since July 2004.

Bed Bath & Beyond dropped $1.21 to $26.19. Quarterly profit fell for the first time in at least 15 years as customers grappled with declining home values and higher energy costs.

Talbots Inc. fell $1.22 to $9.46. The clothing retailer that lost half its market value last year said it plans to exit its children's and men's clothing units, close 78 stores and eliminate 800 jobs.

I would expect consumer stocks to take the brunt of this sell-off, continuing the trend, said Daniel McMahon, head of equity trading at CIBC World Markets Corp. in New York.

Shares of retailers, homebuilders and automakers in the S&P 500 have fallen 6.2 percent since Dec. 31, the second-worst performance among 10 industry groups in the S&P 500 behind technology. The group lost 14 percent last year, trailing only financial companies, which plunged 21 percent.

Since 1931

Ford Motor Co. fell 32 cents to $6.13, the lowest since 1986, after losing its status as the second-largest seller of autos in the U.S. for the first time in 76 years. Automakers' 2007 year-end sales reports yesterday showed Toyota Motor Corp. taking the No. 2 spot held by Ford since 1931.

SLM Corp. declined $2.49, or 13 percent, to $16.67 for the steepest drop in the S&P 500. The biggest U.S. educational lender said it will be more selective in pursuing loan originations and will cut services to borrowers.

Regions Financial Corp. declined $2.48, or 11 percent, to $20.80. Alabama's biggest bank will quadruple its reserve for loan losses to $360 million for the fourth quarter because of slowing real estate markets in Florida and Georgia.

The Fed is behind the curve in lowering interest rates, and today's weak job growth is further evidence of that, said Dan Veru, who helps manage $3 billion as co-chief investment officer at Palisade Capital Management in Fort Lee, New Jersey.

Half-Point Cut?

The odds that the Fed will lower its target for the overnight lending rate between banks by half a percentage point when policy makers hold their next scheduled meeting on Jan. 30 rose to 68 percent from 34 percent in the interest-rate futures market. The odds of a quarter point cut slipped to 32 percent from 66 percent.

The central bank began a series of rate cuts with a half- point move in September, followed by two quarter-point cuts in October and December, bringing the federal funds rate target to 4.25 percent.

Source - Bloomberg

2008 outlook: Fasten your seatbelts

Market strategists expect a volatile year for stocks and that the housing market will swoon. Sound familiar?

Wall Street's top forecasters have some good news and bad news for 2008. Many think stocks will head higher but that unemployment will rise and the overall economy will slow.

In other words, 2008 is going to look an awful lot like 2007. Despite falling housing prices and the subprime mortgage meltdown igniting fears about a broader economic slowdown, stocks are still on track to finish higher in 2007.

For 2008, experts said investors need to be prepared for more woes in the slumping housing market and a slight rise in unemployment.

"2008 will be a sluggish year," Abby Joseph Cohen, Goldman Sachs' chief U.S. investment strategist, told CNNMoney.com. She said many investors are concerned about what could be weak earnings growth in 2008.

"Portfolio managers sense that 2008 will be a very difficult year for corporate profits," she said.

But Cohen believes that stocks could finish 2008 in the plus column as investors anticipate better news in the latter part of the year.

"We believe that the worst time is right now. The worst numbers will be at the end of 2007 and in the first half 2008. We expect an improvement in the second half," she said.

Cohen isn't the only strategist who feels this way. Research firm Thomson Financial pointed out in a recent report that Wall Street analysts expect profits for the S&P 500 to increase in just the single-digits in the first two quarters of 2008 but that overall earnings for the year will be up nearly 15 percent.

With this in mind, Cohen expects the Dow Jones industrial average to end the new year around 14,750, a gain of more than 10 percent from current levels, and that the S&P 500 will close at 1,675, up nearly 14 percent.

Analysts at Thomson Financial are predicting a more modest rise for the market, however. The firm believes the S&P 500 will end at 1,580, a gain of 7 percent.

Still, how can stocks have a good year if so many market strategists are predicting a rough year for the economy?

In a recent report, Cohen wrote that the market is relatively cheap when compared to previous periods of comparable inflation and that stocks are priced for the worst case scenario, i.e. a recession.

But Cohen thinks the economy will not slip into a recession. And one big reason for her optimism is that she thinks the Federal Reserve is likely to keep lowering interest rates in order to make sure the economy doesn't grind to a halt.

Investors like interest rate cuts since they tend to lead to more borrowing by consumers and businesses, which in turn helps to boost economic activity and corporate profits.

"Recent speeches and policy actions suggest that the Federal Reserve is paying close attention...to the smooth functioning of markets and recession avoidance," Cohen wrote.

The Fed cut interest rates three times in the second half of 2007, lowering the key federal funds rate from 5.25 percent in August to 4.25 percent by the end of December.

Economists at Lehman Brothers wrote in a report that they expect the Fed to cut rates several more times in 2008, perhaps to as low as 3.25 percent. The Lehman economists suggested that the economy "may bend but not break" in the new year.

But much of 2008 could be rough. Though the economy is expected to begin to rebound later in the year, economists believe that the slumping housing markets and credit crunch will continue throughout at least the first half of 2008.

Standard and Poor's predicts that the housing market will not finally bottom until October.

Home prices are expected to fall 11 percent over the course of 2008, according to Standard & Poor's.

As the housing market continues to slump, economic growth is expected to slow in 2008. This year, gross domestic product, or GDP, was aided by a strong third quarter, and analysts believe that at 2007's end, the economy will have grown 2.2 percent from the close of the fourth quarter in 2006.

At the end of 2008, however, Lehman Brothers predicts 1.8 percent overall growth, and Merrill Lynch believes that GDP growth in 2008 economy will be only 1.4 percent. Thomson Financial more optimistically expects GDP to grow between 2 percent and 2.5 percent over 2008.

Many analysts point out that although the economy and housing market will struggle in the new year, this may not necessarily result in recession.

But other economists warn that there is still a high risk of recession. "We are at the brink of a recession," Standard and Poor's senior economist Beth Ann Bovino told CNNMoney.com. "We are certainly concerned about the 2008 economy."

Standard and Poor's thinks there is a 40 percent chance of a recession in 2008.

And as the economy slides in 2008, unemployment is expected to increase as well. Standard & Poor's is predicting an unemployment rate of 5.2 percent by the end of 2008, up from the current rate of 4.7 percent. Goldman Sachs expects the unemployment rate to be between 5.5 percent and 5.8 percent.

Nonetheless, Goldman Sachs' Cohen thinks consumer spending and confidence will pick up in the second half of 2008, despite the rise in unemployment.

And analysts at Thomson Financial wrote that they also think the consumer will stay afloat. The firm is forecasting monthly same-store sales growth of about 2 percent to 5 percent throughout the year.

So even though the financial headlines for 2008, particularly the ones about the housing market, may be as scary as the ones from 2007, many investors and consumers could do reasonably well. Just like in 2007.

Source - CNN Money

U.S. Economy: Sales of New Homes Tumble 9% to 12-Year Low

By Bob Sales of new homes in the U.S. fell to a 12-year low in November, pointing to bigger declines in construction that will hinder economic growth in 2008.

Purchases dropped 9 percent to an annual pace of 647,000 and October sales were revised lower, the Commerce Department said today in Washington. Last month's sales were weaker than the lowest forecast in a Bloomberg News survey of economists.

Treasury notes extended their rally and traders added to bets that the Federal Reserve will cut interest rates again in January to prevent a recession. New-home sales are down 25.4 percent so far this year, heading for the biggest annual decline since at least 1963.

This gives a dire picture of the U.S. housing market, said Dana Saporta, an economist at Dresdner Kleinwort in New York. The weakness of the housing industry does raise the risk of recession.

A separate report showed the National Association of Purchasing Management-Chicago's index of American business activity rose this month as new orders increased. The group's index climbed to 56.6, from 52.9 the previous month.

The deepest housing recession in 16 years will worsen as discounts fail to lure buyers and mounting foreclosures swell the glut of unsold properties, economists said. Falling property values may cause consumer spending to cool, increasing the odds the expansion will falter in 2008.

The most important implication of this is it's going to drive down construction outlays and that's a direct effect on GDP, said Neal Soss, chief economist at Credit Suisse Group in New York.

Yields Retreat

The yield on the benchmark 10-year note fell 9 basis points to 4.11 percent at 10:21 a.m. in New York. The dollar weakened against the euro and stocks pared their advance. The Standard & Poor's Supercomposite Homebuilding Index, which includes KB Home, Pulte Homes Inc. and D.R. Horton Inc., declined 2.8 percent to 306.44.

A Bloomberg survey of 68 economists forecast sales would fall to an annual pace of 717,000 from a previously reported 728,000 rate in October, according to the median estimate. Economists' forecasts ranged from a low of 685,000 to a high of 750,000. Government records only go back to 1963.

Sales of new homes were down 34 percent from the same time last year, the biggest 12-month drop since January 1991. The median price fell 0.4 percent from November 2006 to $239,100.

The number of homes for sale at the end of November decreased 1.8 percent to 505,000, the fewest in two years. Still, because sales dropped even more, the inventory of unsold homes at the current sales pace jumped to 9.3 months from 8.8 months in October.

Regional Picture

Purchases fell in three of four regions, led by a 28 percent plunge in the Midwest. Sales dropped 19 percent in the Northeast and 6.4 percent in the South. They rose 4 percent in the West.

The housing recession has deepened since the August turmoil in subprime mortgages led to a worldwide credit shortage. Stricter borrowing standards and a freeze on lending to borrowers with poor credit put mortgages out of reach for more potential buyers. That's driving home prices lower, weakening sales as people hold out for even bigger reductions.

Sales of new houses will probably tumble 8.9 percent in 2008 after a 25 percent drop this year, according to a Dec. 13 forecast from Fannie Mae, the largest mortgage buyer. Sales of new homes in November were 53 percent down from their July 2005 peak.

Prices Decline

Home prices in 20 metropolitan areas fell 6.1 percent in the 12 months to October, the most in at least six years, according to a report this week by S&P/Case-Shiller. The decline raises the risk that more Americans will walk away from properties that are worth less than they owe, economists said.

Lehman Brothers Holdings Inc. is forecasting prices will fall at least 15 percent from peak to trough. By that measure, the S&P/Case-Shiller index is down 6.6 percent so far.

With sales and prices falling, foreclosures rose 68 percent in November from a year earlier. They may continue surging in 2008 as mortgages for some subprime borrowers with adjustable rates reset.

As foreclosures throw more homes onto the market, homebuilders such as Hovnanian Enterprises Inc., New Jersey's largest, are scaling back.

Hovnanian plans to pare down our inventories in virtually all our markets, Chief Executive Officer Ara Hovnanian said on a conference call Dec. 19. It will be a difficult year.

Construction

Housing starts are near a 14-year low and have fallen 48 percent since their January 2006 peak. Declining home construction has subtracted from economic growth for the last seven quarters, and economists are expecting the drag to continue in 2008.

The weaker housing market is also forecast to undermine consumer spending, which makes up two thirds of the economy, as falling property values leave owners feeling less wealthy and with less equity to tap for extra cash.

The odds of recession have increased since the credit markets froze as a result of the subprime crisis. The economy will expand at a 1 percent annual pace in the fourth quarter after growing at a 4.9 percent rate from July through September, according to the median forecast of economists surveyed this month by Bloomberg News.

`The probability of recession is 50 percent for next year at some point, Martin Feldstein, head of the National Bureau of Economic Research, which determines when contractions start and end, said in a Dec. 14 interview. We could see a downturn starting sometime in the spring or the second quarter of next year.

Source - Bloomberg

Crude Oil Rises to a One-Month High After U.S. Inventory Drop

Crude oil rose to a one-month high after an Energy Department report showed that U.S. inventories fell more than expected.

Stockpiles declined 3.3 million barrels to 293.6 million, the lowest since January 2005, the report showed. Supplies were expected to drop 1.5 million barrels, according to the median of responses by 12 analysts in a Bloomberg News survey. Prices rose earlier because of the assassination of Benazir Bhutto, Pakistan's former prime minister.

These numbers were bullish across the board, said James Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois. You have to add some geopolitical premium because of the news from Pakistan. It's clear we are off to the races and will probably test the record tomorrow.

Crude oil for February delivery rose $1.36, or 1.4 percent, to $97.33 a barrel at 11:09 a.m. on the New York Mercantile Exchange. Oil reached $97.50 today, the highest since Nov. 26. Futures touched a record $99.29 on Nov. 21. Prices are up 61 percent from a year ago.

Brent crude for February settlement rose $1.37, or 1.5 percent, to $95.31 a barrel on London's ICE Futures Europe exchange. Prices reached $95.35, the highest since Nov. 26.

The department released its weekly report on inventories at 10:30 a.m. in Washington, a day later than usual because of Christmas.

The combination of bullish inventory numbers and thin volume is sending prices higher, said Christopher Edmonds, the managing principal of FIG Partners Energy Research & Capital Group in Atlanta. There are a lot of people who would love to see prices reach the magical triple digit level before the end of the year. The bias has to be higher until the year ends.

Lower Volume

Trading volumes have been lower than usual because of end- of-year holidays. Nymex oil traders exchanged an estimated 241,452 contracts yesterday, down 31 percent from a week earlier, according to data compiled by Bloomberg.

Total implied fuel demand in the U.S. averaged 21.1 million barrels a day in the four weeks ended Dec. 21, up 1.6 percent from a year earlier, according to the department. Consumption of distillate fuel, a category that includes heating oil and diesel, averaged 4.5 million barrels a day over the period, up 5.7 percent from a year earlier.

The department measures shipments from refineries, pipelines and terminals to calculate demand.

Terrorism

The oil market has been sensitive to suspected Islamic terror assaults since the Sept. 11, 2001, attacks on the U.S. Pakistan borders Iran, which holds the world's second-biggest oil reserves, and is located along the Arabian Sea, where tankers travel before entering the Persian Gulf.

The U.S. backed a partnership between Bhutto and President Pervez Musharraf. President George W. Bush banked on the relationship to return stability to a nuclear-armed country that, according to U.S. intelligence reports and officials, is failing to combat a growing Islamist threat.

Bhutto received a letter from friends of al-Qaeda on Oct. 23, threatening more suicide attacks, possibly using women bombers, her lawyer, Farooq Naik, said.

Oil Rises Above $96 on Expected Supply Drop, Turkish Air Strike

Crude oil rose above $96 a barrel in New York for the first time this month as a government report tomorrow may show a U.S. inventory decline and as Turkish planes bombed suspected Kurdish sites in northern Iraq.

Supplies probably dropped 1.75 million barrels in the week ended Dec. 21, according to the median of nine responses in a Bloomberg News survey of analysts. The Turkish strikes were the latest in a series of cross-border attacks on the outlawed Kurdistan Workers Party, or PKK.

The Turkish attacks are factored in but this isn't a new problem and it has had no impact on the oil flow, said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut. In oil inventories, we're looking for the sixth straight weekly withdrawal. Crude stocks fell below the five-year average last week and are clearly tightening.

Crude oil for February delivery rose $1.63, or 1.7 percent, to $95.76 a barrel at 11:31 a.m. on the New York Mercantile Exchange. Oil reached $96.54 today, the highest since Nov. 27. Futures touched a record $99.29 on Nov. 21 and are up 57 percent from a year ago.

Trading has been lighter than usual because of the end-of- year holidays. Nymex oil traders exchanged 81,634 contracts on Dec. 24, down 82 percent from a week earlier, according to data compiled by Bloomberg.

The main thing today is that this is a thin, volatile market, Armstrong said. If someone wants to push this market, they clearly can.

The Energy Department is scheduled to release its weekly report on inventories tomorrow at 10:30 a.m. in Washington, a day later than usual because of Christmas.

Bombing Raid

Today's bombing raid was at least the third air operation in Iraq this month. Troops were briefly sent across the border on Dec. 17, according to the army. Turkey says it is using intelligence from the U.S. to target the PKK.

Iraq has the world's third-largest crude-oil reserves. The country's northern region is controlled by a semi-autonomous Kurdish administration. Kirkuk, at the center of the region's biggest oil field, is about 100 miles (161 kilometers) from the Turkish border.

Exports from northern Iraqi fields, which run by pipeline to Turkey's Ceyhan export terminal on the Mediterranean Sea, averaged 400,000 barrels a day last month.

The ongoing Turkish air attacks are an excuse to push prices to the upside, said Tim Evans, an energy analyst at Citigroup Global Markets Inc. in New York. It's debatable whether this will have any effect on Iraqi shipments.

Falling Dollar

Crude-oil prices also rose because the U.S. dollar fell against the euro, which bolstered the appeal of commodities as a hedge against inflation. Weak Christmas retail sales in the U.S. indicate consumers are starting to feel pressured by the slowdown in the housing market. The U.S. uses about 25 percent of the world's oil.

Brent crude for February settlement rose $1.45, or 1.6 percent, to $94.15 a barrel on London's ICE Futures Europe exchange.

U.S. Economy: Home Prices Declined at Faster Pace

Home prices in 20 U.S. metropolitan areas fell in October by the most in at least six years, raising the risk that more Americans will walk away from properties that are worth less than they owe.

Values fell a greater-than-forecast 6.1 percent from October 2006, the S&P/Case-Shiller home-price index showed today. The decrease was the biggest since the group started keeping year-over-year records in 2001.

Prices will continue falling as record foreclosures put even more homes on the market while stricter lending rules make financing tougher to get. Declining values also pose a risk to consumer spending by making it harder for owners to tap home equity for extra cash.

You are likely to see more people giving up on their loans as they end up with little or no equity in their homes, said Abiel Reinhart, an economist at JPMorgan Chase & Co. in New York. It's one more factor that weighs on the path of consumption.

Compared with a month earlier, home prices dropped 1.4 percent, the biggest one-month decline since records began. The figures aren't seasonally adjusted, so economists prefer to focus on the year-over-year change.

The median forecast of 12 economists surveyed by Bloomberg News projected a 5.7 percent decline after the index dropped 4.9 percent in the 12 months ended in September.

Manufacturing Slumps

A report from the Federal Reserve Bank of Richmond today also showed manufacturing in its region contracted for the second time in three months in December. Combined with earlier reports this month that showed factory activity slowed in New York and also shrank in the Philadelphia region, the reports suggest the housing slump is filtering through the economy.

Seventeen of the 20 cities in the S&P/Case-Shiller index showed a year-over-year decline in prices, led by 12 percent slumps in Miami and Tampa, Florida. Three cities, Charlotte, North Carolina, Seattle and Portland, Oregon, showed an increase from a year earlier.

All 20 areas covered showed a drop in prices compared with September.

The current state of the single-family housing market remains grim, Robert Shiller, chief economist at MacroMarkets LLC and a professor at Yale University, said in a statement.

Shiller and Karl Case, an economics professor at Wellesley College, created the home-price index based on research from the 1980s.

Prices to Worsen

The housing market may continue to weaken as an increase in foreclosures adds to a glut of unsold homes on the market, spurring sellers to cut prices, economists said.

With supply overhang enormous and mortgage financing tougher to obtain, home prices are going to decline considerably further in the quarters ahead, said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc., a New York forecasting firm.

Lower home prices may also threaten spending. This holiday shopping season is forecast to be the weakest in five years, according to the National Retail Federation. A jump in November sales and a rush of last-minute purchases the weekend before Christmas probably weren't enough to change that outlook, according to analysts.

Stocks dropped for the first time in four days on concern over the outlook for consumer spending, which accounts for more than two thirds of the economy. The S&P 500 index was down 4 points, or 0.3 percent at 12:47 p.m. in New York. The S&P supercomposite homebuilder index was down 0.9 percent.

Fewer Sales

Figures later this week from the Commerce Department may show new homes sold at an annual rate of 718,000 in November, down from October's 728,000 rate, based on the median estimate of economists surveyed by Bloomberg News.

Sales of new houses probably will fall 8.9 percent in 2008 after a 25 percent drop this year, according to a Dec. 13 forecast from Fannie Mae, the largest mortgage buyer.

The market is too challenging to make predictions for fiscal 2008, Ara Hovnanian, chief executive officer of Hovnanian Enterprises Inc., said on a conference call on Dec. 19. It will be a difficult year. The Red Bank, New Jersey- based company reported a net loss of $467 million for the three months ended Oct. 31.

Residential investment has subtracted from economic growth for the past seven quarters. Home building dropped at a 20.5 percent annual pace in the third quarter, the most since 1991.

The S&P/Case-Shiller index and another by the Office of Federal Housing Enterprise Oversight track the same home over time and more accurately reflect price trends, economists said.

Price gauges from the Commerce Department and the Realtors group can be influenced by changes in the types of homes sold. Higher sales of cheaper homes relative to more-expensive properties will bias the figures down.

Source - Bloomberg

U.S. Leading Economic Indicator Index Fell 0.4%

The index of leading economic indicators fell for the third time in four months in November, signaling an increasing risk of a U.S. recession.

The Conference Board's gauge, which points to the direction of the economy over the next three to six months, fell a greater-than-forecast 0.4 percent after declining 0.5 percent in October, the New York-based research group said today. The report followed revised figures from the Commerce Department that confirmed growth accelerated in the third quarter.

The deepest housing slump in 16 years is likely to worsen as foreclosures mount and banks restrict lending, economists said. Declining property values and rising energy costs may also hurt consumer spending, which accounts for more than two-thirds of the economy.

It's certainly pointing to a slowdown, said Roger Kubarych, chief U.S. economist at Unicredit Global Research in New York and a former Federal Reserve researcher. The fourth quarter is going to be much weaker.

Economists forecast the Conference Board's index would decline 0.3 percent, according to the median of 60 estimates in a Bloomberg News survey. Projections ranged from a decline of 0.6 percent to a gain of 0.2 percent.

Fewer Shipments

FedEx Corp., the second-largest U.S. package-delivery company, today said quarterly profit fell as fuel costs rose and demand for freight shipments slowed. The Memphis, Tennessee- based company said its third-quarter earnings would be lower than a year earlier and cut its fiscal 2008 capital-spending forecast.

We see challenging near-term economic trends, Chief Executive Officer Fred Smith said in the statement.

The National Retail Federation in Washington has forecast holiday sales this year will show the smallest gain since 2002.

Stocks erased gains and Treasury securities rose after the reports. The yield on the benchmark 10-year note was 4.02 percent at 10:18 a.m. in New York, compared with 4.03 percent late yesterday.

The leading index is down at an annual pace of 2.3 percent over the last six months, short of the approximate 4 percent to 4.5 percent drop that Conference Board economists say signals recession.

Former Treasury Secretary Lawrence Summers said yesterday it's quite likely a contraction will develop next year, while former Federal Reserve Chairman Allan Greenspan has given it about even odds.

Growth Forecasts

The economy is projected to grow at a 1 percent annual rate this quarter and at a 1.5 percent pace in the first three months of 2008, according to a Bloomberg News survey taken earlier this month. The last recession was in 2001, when the economy grew 0.8 percent.

The slowdown is all the more pronounced because of the surge in growth last quarter. The world's largest economy grew at a 4.9 percent annual pace from July through September, the most in four years, the Commerce Department's final estimate showed today.

Declines in stock prices, the money supply, consumer sentiment and an increase in firings pushed the leading index down, the Conference Board said. Gains in the factory workweek, orders for capital equipment and slower supplier deliveries limited the drop.

The Standard and Poor's 500 Index fell 5 percent on average in November to 1463.39 from the prior month, as mounting defaults on subprime mortgages forced banks to write off losses, leading to spreading declines in financial markets.

More Claims

An average 336,400 workers a week filed first-time claims for jobless benefits in November, up from 327,500 a month earlier. A report today from the Labor Department showed initial claims rose more than forecast to 346,000 last week.

The softening job market combined with declining home values and rising fuel costs may contribute to a slackening in spending during the holidays.

It looks as though consumer spending is going to slow considerably from the third quarter, said Paul Kasriel, chief economist at the Northern Trust Company in Chicago. I really do think the odds are better than 50 percent that we will have a recession.

Seven of the 10 components of the leading economic indicators index are known before the report: initial jobless claims, consumer expectations, building permits, supplier deliveries, the yield curve, stock prices and factory hours.

The Conference Board estimates money supply adjusted for inflation, new orders for consumer goods and orders for non- defense capital goods.

The Conference Board's index of coincident indicators, a gauge of current economic activity, rose 0.2 percent in November after falling 0.1 percent in October. The index tracks payrolls, incomes, sales and production. Combined with gross domestic product, these are the figures tracked by the National Bureau of Economic Research to determine when recessions start and end.

The gauge of lagging indicators also increased 0.2 percent after rising 0.3 percent in October. The index measures business lending, length of unemployment, service prices and ratios of labor costs, inventories and consumer credit.

Stocks knocked back

Wall Street wilts as investors worry about higher inflation, lower economic growth.

Stocks tanked Monday, building on the previous week's declines, as investors continued to worry about the economic outlook amid rising inflationary pressures and slower growth prospects.

The Dow Jones industrial average lost 1.3 percent. The broader S&P 500 index lost around 1.5 percent. The tech-fueled Nasdaq composite lost 2.3 percent.

Treasury prices rose, lowering the corresponding yields as investors sought safety in government debt. The dollar was mixed versus other major currencies. Oil prices slipped and gold prices rose.

Stocks tumbled Friday at the end of a tough week, after a report showing higher consumer inflation raised bets that the Federal Reserve won't be able to keep cutting interest rates, even as the economy continues to struggle.

Those worries remained in place Monday, as investors sorted through the day's economic news and mulled the Fed's first credit auction.

"We're just in that rut right now, where people are worrying about credit and buyers are waiting for a bottom," said Ron Kiddoo, chief investment officer at Cozad Asset Management.

He said that stocks are likely to remain in a funk through the Christmas holidays.

On the upside, "sentiment has grown so negative that the market will likely react well to any good news that comes out over the next few weeks," said James Shelton, chief investment officer at Kanaly Trust Company.

Tuesday brings the November reports on housing starts and building permits, both expected to show declines.
Be prepared for a lot of bumps

The Federal Reserve offered $20 billion in 28-day credit through an auction Monday. The goal is for commercial banks to borrow from the Fed and then boost their lending to businesses and consumers. Results will be released Wednesday.

The series of auctions are part of the central bank's ongoing efforts to loosen up tight credit markets. Last week, the central bank also cut interest rates for the third time in a row since September as a means of adding liquidity to the banking system and tempering the risks to an economic recession.

But investors are worried that the Fed may have to put the brakes on its rate-cutting campaign, particularly if inflationary pressures keep rising. Former Fed Chairman Alan Greenspan said Sunday that the economy was at growing risk for stagflation - an environment in which the economy must contend with rising inflation and slower growth.

Meanwhile, Monday's economic news was mixed.

The New York Empire State index fell to 10.3 in December from 27.4 in November, a steeper-than-expected decline in the regional manufacturing read.

A separate report showed that the third-quarter current-account deficit narrowed more than expected.

And an afternoon report showed that homebuilder sentiment in December remained at a record low for the third straight month.
101 dumbest moments in business

The day also brought a number of corporate mergers, although the news failed to move the broader market higher.

Ingersoll-Rand (IR) said it will buy Trane (TT) for $10.1 billion, in a deal that will create one of the largest air conditioner manufacturers in the world. Ingersoll-Rand shares fell 11 percent, while Trane shares jumped nearly 22 percent.

Aon said it will sell two insurance units for $2.75 billion in separate all-cash deals. Aon shares gained 1 percent.

Loews said its board has approved a spinoff of cigarette marker Lorillard Inc. Loews shares gained over 2 percent.

National Oilwell Varco said it will buy oil drilling gear maker Grant Prideco (GRP) for $7.37 billion in cash and stock. National Oilwell shares fell 8.6 percent and Grant Prideco shares rose 13.6 percent.

Stock declines were broad-based, with 27 out of 30 Dow issues falling, led by Alcoa, Hewlett-Packard, Home Depot, Intel and Verizon.

Market breadth was negative. On the New York Stock Exchange, losers beat winners by more than four to one on volume of 1.44 billion shares. On the Nasdaq, decliners topped advancers by more than four to one on volume of 1.50 billion shares.

Treasury prices rose as investors sought safety in government debt, lowering the yield on the 10-year note to 4.14 percent from 4.24 percent late Thursday. Treasury prices and yields move in opposite directions.

In currency trading, the dollar gained versus the euro and slipped against the yen.

U.S. light crude oil for January delivery fell 64 cents to settle at $90.63 a barrel on the New York Mercantile Exchange.

COMEX gold for February delivery rose $1.30 to settle at $799.30 an ounce.

Housing Crash Deepens in 2008 as U.S. Realtors See Record Drop

For U.S. homeowners, builders, bankers and realtors, the crash of 2007 will only get worse in 2008.

Everyone from mortgage-finance company Fannie Mae to Lehman Brothers Holdings Inc. expects declines next year. Existing home sales will drop 12 percent and existing home prices will fall 4.5 percent, Washington-based Fannie Mae says. Lehman analysts estimate almost 1 million mortgage loans will default in 2008, up from about 300,000 this year.

We're only halfway through the housing shock, said Ethan Harris, chief U.S. economist at New York-based Lehman, the fourth-biggest U.S. securities firm by market value. It's just a matter of time before the weakness spreads to the rest of the economy.

The housing market collapse has been anything but the soft landing that Federal Reserve Bank of San Francisco President Janet Yellen and David Lereah, former chief economist at the National Association of Realtors in Chicago, predicted for real estate at the start of 2007.

Median home prices declined in the U.S. this year, the first annual drop since the Great Depression, according to forecasts from the National Association of Realtors.

I'm not going to sit here and tell you it's going to turn real strong next year, said Jim Gillespie, chief executive officer of Coldwell Banker Real Estate LLC, the largest U.S. residential brokerage, according to Franchise Times. It's not going to turn real strong next year.

`Let the House Go'

Analysts at New York-based CreditSights Inc. predict housing won't rebound until 2009, at best. Moody's Economy.com Inc., the economic forecasting unit of Moody's Corp. in New York, says home sales will hit bottom next year, declining 40 percent from their peak. And U.S. Treasury Secretary Henry Paulson's plan to slow foreclosures won't help those who already are facing the loss of their homes, like C.W. and Sandy Hicks of Las Vegas.

The Hickses refinanced the mortgage on their four-bedroom, 1,300-square foot home two years ago. Their $237,000 adjustable- rate loan resets every month, and now their monthly payment has jumped 50 percent to $2,700. The couple can't afford it.

Source - Bloomberg

Wall Street to Fed: Not good enough

Stocks tank after the Fed cuts rates by a quarter-percentage point, rather than the half some had hoped. Dour comments on the economy factor in too.

Stocks slumped and bonds rallied Tuesday after the Federal Reserve cut the fed funds rate by a quarter-percentage point, as expected, but disappointed some investors looking for a bigger cut.

The Dow Jones industrial average lost 294 points, or 2.1 percent. It was the blue-chip indicator's seventh worst day of the year in terms of both the point and percentage loss.

The broader S&P 500 index lost 2.5 percent. The tech-fueled Nasdaq composite lost almost 2.5 percent. The Russell 2000 small-cap index fell 3.1 percent.

"The stock market was looking for a bigger cut and so there's some disappointment," said Georges Yared, chief investment strategist at Yared Investment Research.

The selling was also influenced by the recent rally on Wall Street, which had left the Dow and S&P 500 within reach of the record highs hit in October.

"The market has gone up in recent weeks on expectations that the Fed would cut, so you're seeing a 'buy the rumor, sell the news' reaction," said Alan Skrainka, chief market strategist at Edward Jones.

Wednesday brings the October trade balance and the weekly oil inventories report.

The central bank voted to cut the fed funds rate by a quarter-percentage point to 4.25 percent. The fed funds rate is a key short-term lending rate that influences consumer loans. The central bank has cut it three times since September, in an attempt to loosen up tight credit markets and protect the economy from falling into a recession amid the fallout in the housing market.

Many Wall Streeters had been looking for the Fed to cut rates by a quarter-percentage point, or 25 basis points, particularly after last week's upbeat November jobs report cooled some fears about the slowing economy. But some on Wall Street had been looking for a bigger cut of a half-percentage point, or 50 basis points. There are 100 basis points in one percentage point.

The Fed also cut the discount rate, which influences bank loans, by 25 basis points, versus broader expectations for a 50-basis point cut.

In the accompanying statement, the bankers changed the language to suggest the economic slowdown was more pronounced than it had been at the time of the last meeting at the end of October.

"Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending," the bankers wrote.

That was more negative than in October, when the bankers said that economic growth was solid and strains in financial markets had eased somewhat. Although at that meeting, the bankers also said that the pace of expansion would slow as a result of the housing market correction.

Stocks had posted modest gains ahead of the decision but quickly turned lower following the afternoon decision and statement. Treasury market gains accelerated rapidly, lowering the corresponding yields.

"Clearly the stock market did not like that they [the bankers] sort of talked down the economy and then only gave them a quarter-point cut," said Joshua Shapiro, chief economist at Maria Fiorini Ramirez Inc. He said that the bond market was also reacting to the perception of a more negative economic outlook.

Treasury prices surged, lowering the yield on the 10-year note to 3.97 percent from 4.15 percent late Monday. Treasury prices and yields move in opposite directions.

In corporate news, General Electric said that 2008 earnings should rise at least 10 percent to $2.42 per share, short of expectations for earnings of $2.49 per share. The stock lost 1 percent.

Citigroup announced that Vikram Pandit would take over the job of chief executive, over a month after former CEO Charles Prince stepped down.

However, Citigroup shares tumbled regardless of the announcement, falling with the rest of the banking sector. JP Morgan Chase, Merrill Lynch, Morgan Stanley and Lehman Brothers were among the other bank stocks falling.

Declines were broad-based, with 28 of 30 Dow stocks falling, including General Motors, American Express, Alcoa, Boeing and Home Depot.

But other corporate news was less positive. Washington Mutual said late Monday that it was cutting both its dividend and more than 3,000 jobs in the wake of the housing and credit market crisis. Citi Investment Research downgraded the stock to "sell" from "hold."

Freddie Mac's chief executive said Tuesday that the company will probably lose another $5.5 billion to $7.5 billion over the next few years amid the ongoing housing market fallout.

H&R Block said it expects to report a steep quarterly loss, due to the impact of its faltering mortgage unit.

Market breadth was negative. On the New York Stock Exchange, losers beat winners by over 5 to 1 on volume of 1.55 billion shares. On the Nasdaq, decliners topped advancers by 3 to 1 on volume of nearly 2.23 billion shares.

In economic news, wholesale inventories were flat in October, the government reported, versus forecasts for a rise of 0.5 percent. Inventories rose 0.6 percent in September.

In currency trading, the dollar gained versus the euro and the yen.

U.S. light crude oil for January delivery rose $2.16 to $90.02 a barrel on the New York Mercantile Exchange.

COMEX gold for February delivery added $3.60 to settle at $817.10 an ounce.

Source - CNN Money

Oil rises, anticipating Fed rate cut

Analysts believe that an interest rate cut will ease worries about the U.S. economy and boost oil demand.

Oil prices rose Tuesday in anticipation that the U.S. Federal Reserve will cut interest rates later in the day, a move that would likely help the U.S. economy - the No. 1 oil consumer - and bolster demand for crude.

News of several crude oil pipeline shutdowns in the U.S. Midwest due to ice storms also supported prices.

Light, sweet crude for January delivery rose 38 cents to $88.24 a barrel in electronic trading on the New York Mercantile Exchange by midday in Europe. The contract had fallen 42 cents to settle at $87.86 a barrel on Monday.

In London, Brent crude futures rose 20 cents to $88.24 a barrel on the ICE Futures exchange.

The Federal Reserve is widely expected to lower its key rate, now at 4.5 percent, by a quarter of a percentage point - or perhaps more - to try to keep troubles in the housing and credit markets from sinking the economy.

"What's been weighing down on the crude oil futures market is concern about the U.S. economy," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore. "If the expected cut indeed holds true or is actually larger, it will bolster the U.S. economic outlook, and that's supportive of oil pricing."

Others, however, said the rate cut would have to be something other than a quarter point to affect oil prices.

"Today all eyes will be on the Fed but with a 25-basis-point cut already priced in, it will take a surprise to move (Nymex oil) out of its current trading range," said Olivier Jakob of Petromatrix in Switzerland.

Dow Jones Newswires reported that several crude oil pipelines, including ones operated by Enbridge and Magellan Midstream Partners, were affected by power outages which forced them to shutdown. There were no estimates of when the pipelines were expected to restart.

Oil futures have dropped more than $10 from their highs in recent weeks as OPEC increased output and as demand slid in the face of high prices.

Several recent reports have suggested U.S. demand for oil and gasoline is falling even as OPEC is boosting production. Total production by the Organization of Petroleum Exporting Countries rose to 31.15 million barrels a day in November, up 40,000 barrels a day from October, according to Platts, the energy research arm of McGraw-Hill Cos. Analysts surveyed by Dow Jones Newswires predict the U.S. government will report on Wednesday that domestic oil inventories rose last week.

Some analysts expect oil futures to trade in a range around $90 until more evidence surfaces of either further demand erosion or supply growth. Others believe futures have begun a seasonal move that could take them as low as $70 a barrel.

"It's nearly the end of the year and many investors are booking profits to boost their annual returns and hence their annual bonuses," Shum said. "Given that, I don't think we're going to rally to $100 a barrel again in the remaining weeks of this year unless there are some unexpected events."

Many analysts have blamed the weakening dollar, in part, for oil's run-up to nearly $100 a barrel last month. The dollar's continuing decline against the euro and other currencies makes oil look more attractive to foreign investors.

Heating oil futures rose 0.78 cents to $2.4852 a gallon (3.8 liters) while gasoline prices rose 0.23 cent to $2.2524 a gallon. Natural gas futures added 6.9 cents to $7.101 per 1,000 cubic feet.

Source - CNN Money

Fed May Cut Interest Rates, Leave Door Open for Further Action

The Federal Reserve will probably cut interest rates today and lay the ground for more to prevent the economy from sliding into recession.

The Federal Open Market Committee will be loath to repeat language from its last meeting that risks between inflation and growth are roughly balanced, economists said. Keeping the phrase would open officials to criticism they're oblivious to the credit squeeze that's threatening growth.

They pretty much tried to draw a line in the sand by going to a balanced-risks statement at the last meeting, and now the world's changed, said Keith Hembre, who used to work at the Fed and is now chief economist in Minneapolis at FAF Advisors Inc., which manages $105 billion. Officials will leave themselves the opening for further cuts, he said.

Chairman Ben S. Bernanke is trying to steer through the housing recession that entered its third year and alleviate a jump in borrowing costs for companies and consumers. The FOMC will lower the benchmark rate by a quarter point to 4.25 percent, according to 113 of 123 economists surveyed by Bloomberg News. Seven anticipate a half-point move and three see no change.

Officials may also enhance their efforts at providing a backstop for bank funding amid a surge in demand for cash, some economists said. Options include reducing the charge for direct loans to banks by half a point, to 4.5 percent.

Most Since Recession

The Fed is scheduled to announce its decision at about 2:15 p.m. in Washington. A quarter point rate cut, after 0.75 percentage point of reductions in September and October, would mark the greatest easing of borrowing costs since the last recession in 2001.

Bernanke and Vice Chairman Donald Kohn recognized in speeches last month a deterioration in credit markets that jeopardizes lending to businesses and consumers, threatening spending. That was a shift from the Oct. 31 statement, when officials signaled they were reluctant to do more.

The reality is, markets have gotten worse in a way they couldn't have expected, and they've gotten worse to a point where there are legitimate concerns that it will spill over to the macroeconomy, said Vincent Reinhart, who was Bernanke's chief staff adviser on monetary policy before leaving in September to join the American Enterprise Institute in Washington. Not acting would be too much of a surprise.

Traders estimate a 26 percent chance of a half-point reduction today, with a quarter-point fully discounted, according to futures prices quoted on the Chicago Board of Trade.

Recession Calls

Economists including former Treasury Secretary Lawrence Summers and the chief U.S. economists of Morgan Stanley and Merrill Lynch & Co. predicted a recession in the past month as strains in credit markets increased.

The collapse of the U.S. subprime mortgage market has led Citigroup Inc., Merrill and other banks and securities firms around the world to write down about $76 billion of losses and markdowns this year.

Concern about the mounting losses diminished banks' willingness to lend cash to each other, sending funding costs higher. The three-month dollar London Interbank Offered Rate climbed to as high as 65 basis points more than the Fed's benchmark rate last week. That's the widest spread, except for on Sept. 18 when the Fed cut rates, in seven years.

Yields on two-year Treasury notes dropped as low as 2.79 percent on Dec. 4, the lowest since November 2004, as investors flocked to the perceived safety of government debt.

Demand for Cash

The scarcity of cash comes at a time when banks typically conserve funds to buttress balance sheets before closing their books for the year.

The Fed's New York branch said Nov. 26 it planned a series of repurchase agreements extending into 2008 to help fill cash shortages. Stephen Cecchetti, a former New York Fed research chief, said officials may consider further steps, such as extending discount-rate loan terms to 90 days, from 30. The outstanding loans rose to the highest since September last week.

If I backed myself into this position, I would grit my teeth and just cut, big time, said Cecchetti, who is now a professor at Brandeis University in Waltham, Massachusetts.

Some Fed officials indicated heightened concern inflation would quicken, before Bernanke and Kohn spoke two weeks ago. Philadelphia Fed President Charles Plosser said Nov. 27 that price expectations may increase because of the rate cuts.

Source - Bloomberg

Consumer Slowdown to Hurt U.S. Economy Into 2008

U.S. economic growth will slow to 1 percent in the fourth quarter as consumer spending cools and the housing slump enters its third year, a survey showed.

Economists cut their estimates for the expansion this quarter from November's 1.5 percent forecast, according to the median of 63 estimates in a Bloomberg News survey taken Dec. 3 to Dec. 10. Gross domestic product in the first three months of next year will also be less than previously projected.

Spending, which accounts for more than two-thirds of the economy, will grow in 2008 at the slowest pace in 17 years as higher fuel costs and falling home values limit consumers' buying power. The Federal Reserve will probably lower interest rates today and again early next year to fend off recession, the survey said.

Everything is going against the consumer, said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, who lowered his growth forecast to 0.5 percent for this quarter. Confidence is off quite a bit, and gasoline is going to take a toll. We're very, very close to a recession.

The world's largest economy grew at a 4.9 percent pace from July through September.

The 1.7 percent average increase in consumer spending this quarter and next would be the weakest back-to-back rise in five years. The 2.1 percent gain projected for all of 2008 is the smallest since a 0.2 percent increase in 1991, during a recession.

No Growth

Consumers are slowing their spending quite considerably, and we have a much, much worse housing situation, said Nariman Behravesh, chief economist at Global Insight Inc. in Lexington, Massachusetts, who slashed his fourth-quarter growth forecast to zero, from 1.3 percent in the November survey.

It wouldn't take much of a shock at this point to push us over the edge into a contraction, he said.

Consumers face headwinds from reduced access to credit, higher gasoline prices and falling home values, Fed chief Ben S. Bernanke said last month.

Policy makers will reduce the benchmark interest rate by a quarter point to 4.25 percent today and follow it with a similar reduction in one of the first two meetings of 2008, according to the survey median. Economists last month projected the Fed would not change policy today.

Some economists predicted the Fed would be more aggressive.

The risks of a recession are not insignificant, said Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago, who forecast a half-point reduction at today's meeting. The Fed looked a bit flip-floppy earlier, and that's hurt them. They now need to step up to the plate.

`Feels Recessionary'

The growth forecast for next year's first quarter was cut by a half point to 1.5 percent and each of the next three quarters was reduced by a 10th of a point. For all of 2008, the economy will probably expand 2.3 percent compared with 2.2 percent this year.

It feels recessionary even if it doesn't fit into the traditional definition of a recession, said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. We'll have painfully slow growth for most of next year.

Slower growth will also help cool inflation. Consumer prices will probably rise 3.8 percent this year, the most since 1990, reflecting the jump in fuel and food costs, the survey showed. Economists projected the cost of living will increase 2.3 percent next year.

The Fed's preferred inflation gauge, which is tied to consumer spending and excludes food and fuel, will rise 1.8 percent in 2008 after a 1.9 percent increase this year, the survey showed. The measure, known as core prices, would be within the range forecast by policy makers.

Not `Bleak'

Core inflation will move sideways to down and headline inflation also will slow as energy prices come off, said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. Not all news is bleak.

Rising wages and more jobs may help consumers weather the jump in fuel costs and the housing slump, economists said. The unemployment rate, currently at 4.7 percent, will only rise to 5 percent by the second half of 2008, according to the Bloomberg survey median.

The economy added 94,000 jobs last month and workers' average hourly earnings were up 3.8 percent from November 2006, the Labor Department reported Dec. 7. About 80 percent of this month's forecasts were received after the figures were released.

The consumer is slowing, not declining, said LaVorgna, who cut his fourth-quarter growth estimate to 0.5 percent from the 1 percent he projected last month. I don't have a strong forecast for 2008, but I don't think we'll have a recession.

Source - Bloomberg

Bernanke Says Fed to Judge Market Turbulence Impact

Federal Reserve Chairman Ben S. Bernanke said volatility in credit markets has affected the economys prospects and policy makers must decide whether the risks between growth and inflation have now shifted.

The outlook has also been importantly affected over the past month by renewed turbulence in financial markets, Bernanke said in a speech in Charlotte, North Carolina. The committee will have to judge whether the outlook for the economy or the balance of risks has shifted materially.

Bernanke spoke a day after remarks by Vice Chairman Donald Kohn stoked investors expectations for the central bank to lower interest rates for a third straight meeting Dec. 11. While the Fed chief discussed both the risks to growth and inflation, he indicated the central bank is watching for additional signs of a pullback in spending.

Neither Bernanke nor Kohn repeated the language in last months Federal Open Market Committee statement that risks between growth and inflation were roughly balanced. Economists interpreted the Oct. 31 statement as a signal policy makers preferred to leave rates unchanged for a time.

Uncertainty around the outlook is even greater than usual, requiring the Fed to be exceptionally alert and flexible, Bernanke said at an annual meeting of the Charlotte Chamber of Commerce.

Consumer Headwinds

The combination of higher gas prices, the weak housing market, tighter credit conditions, and declines in stock prices seem likely to create some headwinds for the consumer in the months ahead, Bernanke said. Continued good performance by the labor market is important for maintaining the economic expansion.

Kohn said yesterday that officials must take account of the deterioration in credit markets when they next meet. Bernanke echoed that view.

The Federal Reserve is following the evolution of financial conditions carefully, with particular attention to the question of how strains in financial markets might affect the broader economy, Bernanke said.

Federal funds futures show traders see a 100 percent chance of a reduction in the benchmark rate next month, with a 26 percent probability of a half-point move. After the 0.75 percentage point of cuts the past two meetings, that would make the most aggressive easing since the last recession in 2001.

Treasuries Rally

Treasuries have climbed this week, sending three-month bill yields below 3 percent for the first time since August, as concern over banks willingness to lend drove investors to the relative safety of U.S. government debt.

At the same time, stocks rallied on optimism the Fed will act to keep alive the economic expansion, now entering its seventh year. The Standard & Poors 500 Index rose 4.4 percent in the past three days, to 1,469.72 at the close in New York.

Economists also predicted lower rates amid concern mounting losses on assets linked to subprime mortgages will cause banks to cut borrowing. Citigroup Inc., Merrill Lynch & Co., Barclays Plc and other banks have already warned of about $50 billion of losses.

Economic reports today indicated growth may falter after accelerating in the third quarter. New-home prices dropped the most since 1970 and jobless claims rose to a nine-month high. Government figures yesterday showed durable goods orders fell for a third month, the longest slump in 3 1/2 years.

Household spending data have been on the soft side, Bernanke said. The committee will have considerable additional information on consumer purchases and sentiment to digest before its next meeting.

Mixed Data

Economic data have been mixed since last months FOMC meeting, the Fed chairman said. He noted that officials will have further reports, including November payroll figures, when they gather Dec. 11.

President George W. Bushs economic advisers today followed Fed officials move last week to lower their outlook for growth next year. Fed policy makers now expect U.S. gross domestic product to increase 1.8 percent to 2.5 percent in 2008, notably below the 2.5 percent to 2.75 percent they predicted in July.

Bernanke said inflation has remained moderate. Still, increases in the prices of food, imported goods and energy products may raise inflation and inflation expectations, he said.

The effectiveness of monetary policy depends critically on maintaining the publics confidence that inflation will be well- controlled, Bernanke said. We are accordingly monitoring inflation developments closely.

Higher Risk

In financial markets, risk spreads have increased since the Fed met Oct. 30-31, an index tracked by Citigroup Global Markets Inc shows. The index rose to a high of 0.99 on Nov. 22 from 0.77 on Nov. 1, with 1 being the highest level of risk aversion. It was at 0.94 today.

Fed officials have tried to meet the surge in demand for cash, first lowering the cost of direct loans to banks in an unscheduled meeting in August. The central bank cut both the discount rate and its key rate in September and October. The New York Fed also said this week it plans a series of long-term repurchase agreements through year-end to ease funding shortages.

Source - Bloomberg

U.S. Sales Rose 8.3% Day After Thanksgiving

U.S. consumers spent $10.3 billion on holiday purchases yesterday, an 8.3 percent increase from last year, after retailers promoted electronics and toys to woo shoppers.

Consumers remained resilient and proved they were willing to spend even with oil prices rising and other economic pressures, ShopperTrak RCT Corp. said today in a statement. The day after Thanksgiving, dubbed Black Friday, typically accounts for between 4.5 percent and 5 percent of all holiday sales, the company said.

Holiday sales will increase 3.6 percent this year, the Chicago-based research firm estimates, trailing a 4.8 percent gain last year. Retailers have responded to the anticipated drop by offering discounts on flat-panel TVs and diamond necklaces to lure shoppers.

It's an extraordinary number, beyond what we anticipated, Bill Martin, co-founder of ShopperTrak, said in an interview.

I think there was pent-up demand given the slow sales in October and November because of unseasonably warm weather, and people want to find value for their dollar and reacted to the specials.

ShopperTrak estimates customer visits to stores will drop 2.5 percent this holiday season, which covers the 32 days between Thanksgiving Day and Christmas.

Seeking Bargains

Sales in November and December may rise 4 percent, the slowest gain since 2002, according to the National Retail Federation in Washington. About 55 percent of shoppers said they will spend less this year than in 2006, according to a Discover Financial Services survey.

Consumers flocked to Toys R Us Inc., Wal-Mart Stores Inc., Macy's Inc. and other retailers in the pre-dawn hours yesterday to find bargains on Nintendo Wii game consoles and sterling-silver jewelry.

The day after the U.S. Thanksgiving holiday is called Black Friday because at one time it was considered the day retailers turned profitable for the year.

Kenyata Luckey, a 22-year-old waitress, is spending about $300 this year, half the amount she spent last year, because there aren't as many good deals at Target Corp. and Wal- Mart.

She bought remote-control cars, a Big Wheel bike and stocking stuffers for her son, niece and nephew at an Atlanta Target store at 7:30 a.m. yesterday. A talking-doll set she wanted cost $50, and wasn't on sale, so she didn't buy it.

There are sales, but not on the stuff I wanted, Luckey said.

Howard Davidowitz, chairman of Davidowitz & Associates Inc., a New York-based retail consulting firm, says the best deals are yet to come.

You've got to move product, Davidowitz said yesterday. And retailers are on a terrible sales trend, so there is no choice but to sell the inventory at what you can sell it at.

ShopperTrak measures foot traffic in shopping centers and malls using more than 45,000 video devices.

Source - Bloomberg

China stocks plummet

Worries that Beijing will try to rein in economy send Shanghai index lower 4.4%; Tokyo's Nikkei edges higher.

Most Asian markets fell Thursday, with shares in Hong Kong and Shanghai sliding sharply on concerns that Beijing will take steps to cool China's economy.

The region's biggest bourse in Tokyo ended mixed amid persistent worries over the outlook for the U.S. economy, a vital export market for Asia, after Wall Street dropped again overnight.

There still is a lot of uncertainties in the U.S. economic outlook, as well as on China's macro policies, that could dampen buying interest in the near term, said Peter Lai, a director at DBS Vickers in Hong Kong.

In Hong Kong, the Hang Seng index sank 613.27 points, or 2.3 percent, to 26,004.92 after earlier rising as much as 1.4 percent. Leading decliners were port operator China Merchants Holdings and rival Cosco Pacific.

Some investors held back because of the U.S. Thanksgiving holiday Thursday.

They were were also discouraged by economic data in the U.S. released Wednesday that showed a drop in consumer sentiment, with the Conference Board's Index of Leading Economic Indicators falling 0.5 percent in October. The Dow Jones industrial average fell 1.62 percent Wednesday to 12,799.94.

Asian markets have been battered in recent weeks.

Since reaching record highs in October, benchmark indices in both Hong Kong and Shanghai - two of the world's best-performing markets this year - have fallen 17 percent. In Japan, the Topix index of all the issues of the Tokyo Stock Exchange's First Section, has declined nearly 21 percent from its 2007 high in February.

Some analysts see a buying opportunity.

There are not enough factors to justify a further drop in Japan shares, said Yasushi Hoshi, strategist at Daiwa Securities in Tokyo.

On the Chinese mainland, the Shanghai Composite Index plunged 4.4 percent to 4,984.16 on expectations of further economy-cooling measures. Premier Wen Jiabao suggested earlier this week that China needs to do more to prevent a bubble in stock and property prices.

Concerns over PetroChina's valuation following its Nov. 5 trading debut, when it tripled from its initial public offering price, also dampened buying sentiment. PetroChina lost 4.6 percent Thursday.

Still, traders said the Shanghai index was unlikely to fall much further given the ample liquidity available for share dealings.

What the market lacks isn't cash but confidence, said Simon Wang, an analyst at Xiangcai Securities.

In Tokyo, the benchmark Nikkei stock index rose 0.34 percent to 14,888.77 in a pre-holiday session as the dollar rebounded against the yen from a 2 1/2-year low hit overnight.

But concern over the exposure of insurance companies to the problems in the U.S. mortgage market dragged down the broader Topix index, which dipped 0.09 percent to 1,437.38 points.

Finance Minister Fukushiro Nukaga and Bank of Japan board member Seiji Nakamura both expressed concern about how problems in the U.S. economy might affect Japan. Traders said the market is especially sensitive to the health of consumer spending ahead of Christmas in the U.S.

Japanese trading houses Mitsui & Co. and Sumitomo Corp. were among the gainers.

Katokichi Co. jumped 17 percent to 694 yen after Japan Tobacco Inc. and instant noodle maker Nissin Food Products Co. said Thursday they will jointly buy the frozen food producer in a deal exceeding ¥100 billion (nearly $1 billion) to create Japan's biggest frozen food maker.

In currency dealings, the U.S. dollar was trading at ¥109.00 midafternoon, up from ¥108.68 late Wednesday in New York. It dropped as low as ¥108.25 in the New York session. The euro rose to $1.4860 from $1.4848.

Financial markets in Japan will be closed Friday for the Labor Thanksgiving Day holiday. The markets will reopen on Nov. 26.

Elsewhere, Thailand's benchmark stock index rose 0.2 percent to 808.8, shaking off sour sentiment that dragged it to a 10-week low of 796.9.

Indonesia's main index rose 0.2 percent to 2,569.5 in thin volume.

Malaysian shares fell on concerns over the health of the U.S. economy and high oil prices. The Kuala Lumpur Composite Index fell 1.2 percent to 1,344.2.

Philippine shares continued to fall, weighed down by the heavy losses on Wall Street. The Philippine Stock Exchange Index dropped 0.9 percent to end at 3,478.9, its third day of decline.

South Korean shares fell for a sixth straight session, dropping below the psychologically important level of 1,800 despite gains in the telecommunications sector and exporters such as Samsung Electronics and Hyundai Motor. The Korea Composite Stock Price Index, or Kospi, shed 0.4 percent to finish at 1,799.0.

Australian investors remained nervous over global fallout from the problems with risky housing loans in the U.S. The benchmark S&P/ASX 200 index dropped 0.8 percent to close at 6,334.3, after hitting its lowest level in two months at 6,312.6.

Taiwan shares rose on bargain-hunting. The Weighted Price Index of the Taiwan Stock Exchange rose 0.2 percent to 8,499.4, rebounding from Wednesday's three-month low.

New Zealand stocks fell after sharp drops in the U.S. and U.K. overnight. The NZX-50 index lost 0.4 percent to close at 4,054.2 point.

Source - CNN Money

Federal Reserve battles recession fears

Rising oil prices and falling bond yields are making the Fed's job tougher. But Wall Street is still hoping for a rate cut in December and more in 2008.

With oil prices approaching $100 and the yield on the benchmark 10-year U.S. Treasury note briefly dipping below 4 percent Wednesday, Ben Bernanke and his fellow Federal Reserve policymakers find themselves in a serious quandary.

On the one hand, the spike in oil prices could clearly be viewed as a sign of inflation. So that's a good argument for the Fed to keep its key federal funds rate unchanged when it has its next meeting on December 11, some economists say.

However, the spike in oil has the potential to lead to higher gas prices at the pump as well as steeper home heating costs this winter. With that in mind, $100 oil might be more of a tax on consumers and could weaken the economy.

The economy is on the brink of a recession, said Mark Zandi, chief economist with Moody's Economy.com, an independent research firm. Hand wringing about inflation is misplaced. The Fed should be focused on growth. Inflation is not an issue for 2008.

Falling bond yields also paint a gloomier picture of the economy, one of weakness. Bond yields typically fall when the economy is slumping. The yield on the 10-year has slipped from about 4.7 percent in mid-October to its current level. And the subprime mortgage crisis appears to be getting worse.

Several financial institutions, ranging from big mortgage lenders such as Washington Mutual and Countrywide Financial to more diversified banks like Citigroup, Wachovia and Bank of America, have been hit hard by rising delinquencies and mortgage investments gone sour.

The mortgage woes have also led to problems at prominent investment banks such as Merrill Lynch as well as Fannie Mae and Freddie Mac, the two government sponsored enterprises which play an important role in the home buying process since they are the largest purchasers and guarantor of residential loans.

The housing market may not turn around anytime soon either. To that end, the Fed lowered its economic growth forecast for 2008 Tuesday, citing weakness in housing.

And Treasury Secretary Henry Paulson told The Wall Street Journal Wednesday that he expected the potential number of mortgage defaults in 2008 to be significantly bigger than this year. This surprised some market observers since Paulson had previously been more upbeat about the outlook for next year.

This is a significant change coming from Paulson given his optimism previously, said Ken Kim, an economist with Stone & McCarthy Research Associates, a fixed income and economic research firm based in Princeton.

As such, Wall Street now expects the Fed to cut rates by at least a quarter of a percentage point on December 11. What's more, investors are pricing in an 8 percent chance that the central bank will lower rates by a half of a percentage point, to 4 percent, according to fed funds futures listed on the Chicago Board of Trade.

The Fed cut its key federal funds rate, an overnight bank lending rate that influences what consumers pay on various types of loans, by a half-percentage point on September 18 and followed that with a quarter-point cut on October 31.

Still, some market observers and economists are debating what the Fed's next move really should be.

Drew Matus, an economist with Lehman Brothers, argues that the Fed should hold rates steady at its December meeting. He said the Fed needs to assert itself to Wall Street and show that it is more concerned about what's going on in the actual economy, not with stock prices.

Yes, the financial markets are saying that the Fed needs to cut again. But if you look at the economy rather than the financial markets, the economy is in okay shape, he said. Are we going to be rejoicing about the rate of growth? No. But it will be growth and not a decline.

According to the Fed's new outlook, the central bank is predicting that the economy will grow at between a 1.8 percent and 2.5 percent clip in 2008, down from an anticipated growth rate of 2.4 percent to 2.5 percent this year.

Phil Dow, director of equity strategy with RBC Dain Rauscher, also thinks that the economy is in reasonably decent shape.

There is a disconnect. The economic reality isn't as bad as some are indicating, Dow said. A mentor of mine told me that real risk is at its highest when perceived risk is low. But right now, people are afraid of their own shadow.

Dow argues that the recent volatility in the markets has more to do with hedge funds trying to lock in gains following a strong market rally from mid-August through late October and is not a sign that Wall Street now thinks a recession is imminent.

He added that once banks report their fourth-quarter results in January, which he believes will include a kitchen sink of charges and writedowns related to the mortgage meltdown, market sentiment may finally begin to improve.

Nonetheless, Dow thinks the Fed will, and should cut rates by a quarter-point. He thinks the Fed would send the wrong message, however, by slashing rates by a half-point.

A half-point cut on top of all the negative news would just make things worse, he said.

But Zandi thinks a half-point cut is not out of the question, especially if stocks continue to decline. He also said the Fed might need to consider cutting its discount rate, a largely symbolic rate that determines how much banks pay when borrowing directly from the Federal Reserve, before the December 11 meeting.

The Fed did exactly that in August, lowering the discount rate by a half-point in an unscheduled meeting. It lowered the discount rate again in September and October along with the federal funds rate.

But there still is the issue of oil prices and the weak dollar. If the Fed continues to lower interest rates, that could help the economy by restoring confidence in the financial system, particularly the mortgage market.

It comes at a cost, however, as more rate cuts could put further upward pressure on oil and downward pressure on the dollar. That might be a risk the Fed needs to take though.

Oil and the dollar could throw a monkey wrench in the Fed's plans but if you put everything together, rising oil prices should eventually crimp demand and that should keep inflation under wrap, Kim said.

As for the dollar, it would weaken further with rates going lower but it's a consequence the Fed would have to accept because at the end of the day, the Fed is trying to promote maximum employment as well as stable prices, Kim added.

And Lehman's Matus said the weak dollar is actually having some big benefits. In fact, he believes that it might be what keeps the economy from slipping into a recession in 2008. He said that if consumer spending slows in 2008 because of the mortgage crisis and corporations also pull back on spending, robust exports to countries with stronger currencies could be the economy's salvation.

The exports side is what saves us. One of the implications of the Fed cutting rates would be keeping exports up with a weak dollar, Matus said.

With that in mind, even though Matus does not think the Fed will cut rates in December, he does believe the Fed will lower rates several times next year, perhaps to as low as 3.75 percent.

But Stefane Marion, assistant chief economist with National Bank Financial in Montreal, said that as long as more bad news keeps coming out of financial institutions, the Fed should be even more aggressive.

We're in unchartered territory because of what we are seeing with Fannie and Freddie. It is difficult to assess what the final end point is in this scenario, Marion said. He argues that the Fed could cut rates several times in 2008, bringing them perhaps as low as 3 percent by next summer.

Source - CNN Money