US RATE FUTURES-Prospects for Fed cuts inch higher
Fri Sep 12, 2008 9:21am EDT
By Ros Krasny
CHICAGO, Sept 12 (Reuters) - U.S. short-term interest rate futures on Friday showed traders consider Federal Reserve rate cuts by late this year more likely after August retail sales were reported weaker than expected and wholesale inflation pressures eased.
Over the past week, futures have swung from a bias toward higher interest rates from the Fed toward a possible rate cut as turmoil continues in financial markets.
The implied prospects for a Fed rate cut by year-end hit a new cycle high of 36 percent after the data, up from 28 percent late on Thursday.
Still, futures show an 88-percent chance that the Fed will hold benchmark rates steady at 2 percent at its policy meeting on Tuesday.
August retail sales fell by 0.3 percent against forecasts for a 0.2-percent increase, while sales excluding autos tumbled by 0.7 percent. July's sales were revised to down 0.5 percent from the original 0.1 percent result.
"The retail sales data was significantly weaker than expected both in August, particularly with the downward revision to July. The weakness was broad-based," said Alan Ruskin, chief international strategist at RBS Greenwich Capital in Greenwich, Connecticut.
A closely watched sales measure that excludes autos, gasoline and building materials fell 0.2 percent in August after rising by 0.4 percent in July.
"The impact of the tax rebates is over and core sales are fading fast," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.
At the same time, the producer price index for August fell by 0.9 percent, the biggest monthly decline since October 2006.
Core prices, stripped of food and energy costs, rose by 0.2 percent, as expected. The year-on-year increase in core prices, at 3.6 percent, was the largest since May 1991.
"It is going to take a some time for lower commodities to provide meaningful relief for the consumer," Ruskin said.
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