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  • bluecheese4u bluecheese4u Feb 5, 2008 2:31 PM Flag

    Merrill Lynch: Odds of an emergency rate cut rose after today's ISM release

    Merrill Lynch: Odds of an emergency rate cut rose after today's ISM release

    U.S. Economy: Service Industries Unexpectedly Shrank (Update3)

    By Shobhana Chandra

    Feb. 5 (Bloomberg) -- U.S. service industries unexpectedly contracted in January at the fastest pace since the 2001 recession as the housing slump deepened and consumer spending cooled.

    ``This is a stunning fall,'' said Michael Moran, chief economist at Daiwa Securities America Inc. in New York. ``If accurate, it's dire news on the economy.''

    The Institute for Supply Management's non-manufacturing index, which reflects almost 90 percent of the economy, fell to 41.9, from 54.4 the prior month, the Tempe, Arizona-based ISM said. A separate report today by Royal Bank of Scotland Group Plc showed Europe's service industries grew in January at the slowest pace since 2003.

    Stocks fell and Treasury notes rallied as traders added to bets that the Federal Reserve will cut its benchmark rate by another half a percentage point at or before its March meeting. Jeffrey Lacker, the president of the Richmond Federal Reserve Bank, said today that further reductions may be needed, citing the risk of a ``mild recession.''

    Today's reports also show the economic slowdown that began with a U.S. housing downturn is jeopardizing Europe's expansion and increasing pressure on the European Central Bank to follow the Fed and cut rates.

    `Further Easing'

    ``The prominence of downside risks means that further easing ultimately may be warranted,'' Lacker said in a speech to bankers in Charleston, West Virginia.

    Odds of an emergency rate cut rose after today's ISM release, Merrill Lynch & Co. economists said in a note. Policy makers next meet on March 18. Last month, Chairman Ben S. Bernanke and his colleagues lowered the main rate three-quarters of a point eight days before they gathered Jan. 29-30.

    ``This keeps the Fed in aggressive rate cutting mode with a strong chance of an inter-meeting move possible before the March 18'' meeting,'' Merrill economists Sheryl King and David Rosenberg wrote.

    The ISM published the data, which assesses retailers, banks and construction companies, more than an hour earlier than scheduled. The release time was changed because of concerns about a ``breach'' of embargoed information, ISM spokeswoman Andrea Waas said in a telephone interview.

    `Possible Breach'

    ``The possible breach was very general information disclosed during a private conversation by someone who is normally not involved in the report process but was involved this month due to unique circumstances,'' Waas wrote later in an e-mailed response to questions. ``It was an innocent slip of the tongue.''

    The index was projected to fall to 53, the median forecast in a Bloomberg News survey of 65 economists. Estimates ranged from 51 to 55. A reading of 50 is the dividing line between growth and contraction, and the index has averaged 57.6 since its inception in July 1997.

    American Express Co. and Wendy's International Inc. have been among companies reporting profit has been hurt by the economic slowdown.

    ``The economy is shrinking,'' said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. ``How much is still uncertain.''

    The yield on

58.56-0.32(-0.54%)11:31 AMEDT