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Fed Policy and Interest Rate Outlook: Fed target unchanged through November

Prof. Peter Morici - 7/29/2007

Treasuries are currently overbought. The long end of the Treasury yield curve will rise as the subprime scare subsides, freeing up additional cash for solid mortgages and enterprises with sound business plans. The ten-year Treasury rate should rise through the balance of the third quarter. Look for something above 5.10. Treasury long rates are artificially suppressed by the subprime scare. This may be a good time to move high quality corporate and municipal debt, and for investors to move from Treasuries to lower grade, but investment quality corporate debt.

Mortgage financing will remain readily available at reasonable rates, especially for creditworthy borrowers with stable, verifiable incomes. Less creditworthy borrowers will continue to find financing; however, risks will be better assessed and more fairly priced into mortgage rates, and investors will be more appropriately rewarded for accepting attendant risks.

Stocks: Overall the interest rate environment will be positive for stocks. With the economy poised to grow between 2.5 and 3 percent in the second half, the focus will be on overseas growth and its contribution to corporate profits.

Profits growth will be strong and continue to outperform the U.S. economy. Most large U.S. companies earn a good deal of their profits abroad. The combination of strong growth in Asia, coupled with moderate growth in the United States, is good for their bottom line.

A weaker dollar makes U.S. equities a particular bargain for foreign investors, especially in Europe and Japan. Large U.S. multinationals earning significant shares of their profits in Asia will prove a great play for European and Japanese investors who sit on strong euros, pounds and yen but have few good investment options at home.

Moderate GDP growth, favorable interest rates, profits advancing strongly, and robust foreign demand for U.S. equities should power up U.S. stock prices. The market should regain its footing, and stock prices should recover nicely and move up further.

Here are my forecasts for upcoming economic data.

Forecast Previous
Week of July 30 Period

July 31
Employment Cost Index - Q2 0.8% 0.8

Personal Income - June 0.5% 0.4
Per Con Expenditures 0.3% 0.5
PCE Deflator 0.2% 0.5
Core PCE Deflator 0.2% 0.1
Real Per Consumption 0.1% 0.1

Chicago PMI - July 58 60.2
Construction Spending - June 0.3% 0.9
Consumer Confidence - July 102.0 103.9

August 1
ISM Index - July 55 56.0
ISM Prices 64.5 68.0
Pending Home Sales - June 98.0 97.7

Auto Sales (SAAR) - July 16.20m 15.6
Car Sales 7.65m 7.63 Domestic: 5.26 5.25
Truck Sales 8.55m 7.97 Domestic: 7.03 6.55

ADP Employment – July 100 150

August 2
Factory Orders - June 1.0% -0.5
Durable Goods Orders 1.4% -2.4 weight .514
Nondurable Goods Orders 0.7% 1.6 weight .486

Initial Jobless Claims 305k 301

August 3
Non-farm Payrolls - July 130k 132
Unemployment Rate - July 4.5% 4.5
Ave. Hourly Earnings - July 0.3% 0.3
Ave. Work Week - July 33.8 33.9

ISM Services - July 59.0 60.7
ISM Services - Prices 63.0 65.5


Week of August 6

August 7
Productivity (p) - Q2 1.5% 1.0
Unit Labor Cost 3.5 1.8

Consumer Credit - Jun $8.0b 12.9
Federal Funds Target 5.25 5.25

August 8
Wholesale Inventories - Jun 0.3% 0.5
Wholesale Sales 0.8 1.5

August 10
Export Prices - July 0.3% 0.3

Import Prices - July 1.4% 1.0
Import Prices, ex petroleum 0.2% 0.2