NEWS / Foreign Exchange

The FOMC is likely to leave the fed funds rate unchanged at 5.25%

The FOMC is likely to leave the fed funds rate unchanged at 5.25%, and the statement might point out risks for both inflation and economic growth. Leading indicators may have fallen noticeably in February, and the January figures are likely to be revised downwards too. There are several housing- related indicators on this week??™s economic agenda: due to colder weather, existing home sales may have dropped, and after having plunged in January, housing starts may only have recovered modestly in February.

The NAHB index jumped five points to 40 in February ??“ 10 points above its September 2006 low, but still more than 30 points below the June 2005 level. After this substantial improvement, a downward correction seems quite probable. But given the favourable development of mortgage applications, we only expect the NAHB index to fall to 38 in March.

Housing starts plunged by 14.3% mom to 1408k in January, their lowest level since August 1997. The extent of the drop may have been overstated, so we expect housing starts to have recovered somewhat. However, due to colder-than-usual winter weather, they might only have risen about 3% mom to 1450k in February. Building permits may have continued to fall from 1568k to about 1540k, which would be almost 30% below last year??™s level.

It is generally expected that the FOMC will leave the federal funds rate unchanged at 5.25% for the sixth consecutive meeting. The financial markets will thus focus on the statement. January??™s statement was a little more upbeat about the economy, although overall the economy was only expected to expand at a moderate pace over the coming quarters. In view of the stock market correction and the sharp deterioration in the subprime mortgage market, it is possible that the FOMC will place more emphasis on the economic risks this time. The committee might reiterate that inflation pressures are likely to moderate over time. But given that core inflation is still higher than desired, it could point out that some inflation risks still remain, thus not ruling out the possibility of further tightening. However, the statement couldmake it clear that rate adjustments in either direction will depend on how the inflation outlook and economic growth develops. It could therefore sound more neutral than before.

Initial jobless claims in the week ending 10 March fell again by 10k to 318k. We expect initial jobless claims in the week ending 17 March to rise to about 330k, close to the latest 4-week moving average.

It had been initially stated that January leading indicators had risen by 0.1% mom, but given the much worse-than-expected development of capital goods and construction orders, we reckon that there is likely to be a significant downward revision to ??“0.1% mom. Moreover, leading indicators are expected to have fallen by up to 0.4% mom in February: The main negative contributions will come from higher jobless claims, lower consumer expectations, slower deliveries and the inversion in the yield curve. Neither real M2 nor a possible rebound in orders will compensate for this. The annual rate may have remained slightly negative, but the annualised 6-month rate could still have reached about 1%.

Existing home sales rose sharply from 6.27m to 6.46m in January. But given the plunge in new home sales at the beginning of the year and cold temperatures, we expect existing home sales to have fallen markedly to about 6.20m in February. This would be the lowest level since the summer of 2003.