Financial Institutions and Markets FIN 304 Dr. Andrew L. H. Parkes Day 4 “How do financial markets work?” 卜安吉

Financial Institutions Financial Institutions and Marketsand Markets

FIN 304FIN 304

Dr. Andrew L. H. ParkesDr. Andrew L. H. Parkes

Day 4Day 4““How do financial markets work?”How do financial markets work?”

卜安吉卜安吉

Financial Institutions & Markets, MiFinancial Institutions & Markets, Miscsc

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Price IndicesPrice Indices

GDP deflatorGDP deflator

Uses Current Year Uses Current Year Quantities – Bought todayQuantities – Bought today

Consumer Price IndexConsumer Price Index

Uses Base Year Quantities Uses Base Year Quantities – Bought in the Base Year – Bought in the Base Year

Are they the same?Are they the same?

Shanghai Dow Stock Index - WSJ


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What did you buy in 1967?What did you buy in 1967?

OK then try 1982?OK then try 1982?

These are the base These are the base yearsyears

Were the goods the same?Were the goods the same?

Notice even our example!Notice even our example!

Chain Weighted GDP Chain Weighted GDP Price index nowPrice index now

Dow Jones World Stock Index


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What did today’s purchase cost What did today’s purchase cost in 1982? 1967? in 1982? 1967?

That’s the Paasche That’s the Paasche IndexIndex

Today’s goods, base Today’s goods, base year pricesyear prices

An MP3 player in 1982?An MP3 player in 1982?

A digital Camera?A digital Camera?

So there are problems So there are problems with Price indices …with Price indices …


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What happened yesterday in the What happened yesterday in the U. S.? U. S.?

The Fed did what?The Fed did what?

Lowered the Fed Lowered the Fed Funds Rate – the Funds Rate – the interest rate that interest rate that banks borrow banks borrow reserves from each reserves from each other (at the Fed)other (at the Fed)

Lowered the Discount Lowered the Discount RateRate

Graph source: WSJ


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What happened yesterday in the What happened yesterday in the U. S.? U. S.?

Usually both move Usually both move togethertogether

Fed lowered Discount Fed lowered Discount Rate alone .5% once a few Rate alone .5% once a few months agomonths ago

Notice inflation – going in Notice inflation – going in the opposite direction – the opposite direction – this is NOT a good sign!this is NOT a good sign! Source: NY Times


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Economic Growth Slowing – AND Economic Growth Slowing – AND … …

"Economic growth is "Economic growth is slowing, reflecting the slowing, reflecting the intensification of the intensification of the housing correction and housing correction and some softening in some softening in business and consumer business and consumer spending," the Fed spending," the Fed said. "Moreover, said. "Moreover, strains in financial strains in financial markets have increased markets have increased in recent weeks."in recent weeks." (Fed (Fed Statement)Statement) Sources: Fed and

BLS


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Inflation Risks remain – More? Inflation Risks remain – More?

At the same time, "some inflation At the same time, "some inflation risks remain" due to elevated risks remain" due to elevated energy and commodity prices.energy and commodity prices. (Fed (Fed Statement)Statement)

Unlike last October, when the Fed said the Unlike last October, when the Fed said the risks of weaker growth and higher inflation risks of weaker growth and higher inflation were roughly balanced, implying no were roughly balanced, implying no predisposition to cut rates again, Tuesday it predisposition to cut rates again, Tuesday it elected not to assess the balance of risks. It elected not to assess the balance of risks. It said it "will continue to assess the effects of said it "will continue to assess the effects of financial and other developments on financial and other developments on economic prospects and will act as needed."economic prospects and will act as needed."

Sources: Fed and BLS


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What have I Hammered ON in What have I Hammered ON in Class? Class?

3 Goals of any 3 Goals of any MacroeconomyMacroeconomy

Full EmploymentFull Employment Economic Growth Economic Growth Price StabilityPrice Stability

Sources: WSJ and BLS


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Anemic new jobs? Anemic new jobs?

New private-sector jobs New private-sector jobs increased an "anemic" increased an "anemic" 64,000 last month, he 64,000 last month, he said. The average said. The average monthly increase for monthly increase for private-sector jobs has private-sector jobs has been 74,000 this year been 74,000 this year through November, through November, compared with an compared with an average gain of 169,000 average gain of 169,000 jobs a month last year -- jobs a month last year -- a 56% decline. a 56% decline.

Sources: WSJ and BLS


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Notice “They” always help me! Notice “They” always help me!

Whatever I TeachWhatever I Teach

The Markets helpThe Markets help The Fed helpsThe Fed helps Actually, it really Actually, it really

happens every single happens every single day!day! Sources: WSJ and

BLS

The Labor Department reported that employment at nonfarm businesses rose by 94,000 jobs in November. That followed revised increases of 170,000 in October and 44,000 in September; those gains were initially estimated at 166,000 and 96,000, respectively. The unemployment rate stayed at 4.7% for the third-consecutive month.


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Recession – 38% Risk so … Recession – 38% Risk so … “Maybe” “Maybe”

Macroeconomic Advisers, a Macroeconomic Advisers, a widely-followed forecasting widely-followed forecasting firm, said Tuesday it now firm, said Tuesday it now expects expects the economy to contract the economy to contract slightlyslightly in the current quarter, in the current quarter, the first time it would have the first time it would have done so since the recession of done so since the recession of 2001. It expects 2001. It expects growth to growth to return to 1.8%return to 1.8% in the first in the first quarter of next year.quarter of next year.

Sources: http://online.wsj.com/article/SB119739876442121375.html?mod=hps_us_whats_news

Accessed on December 12, 2008 at 6:02 am

ONE Quarter of Negative GrowthTHIS QUARTER – 4th!


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Inflationary Expectations? Inflationary Expectations?

Inflation expectations for Inflation expectations for the coming year rose to the coming year rose to 3.5%, while long-term 3.5%, while long-term expectations increased as expectations increased as well. The share of people well. The share of people who say that now is a who say that now is a good time to buy a house good time to buy a house because of low pricesbecause of low prices or a or a good deal hit 55%, a good deal hit 55%, a record high. record high.

Source: WSJ see slide 12


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WAGE Inflation? WAGE Inflation? The Labor Department said that The Labor Department said that

average hourly earnings jumped average hourly earnings jumped a substantial $0.08, or 0.5%, to a substantial $0.08, or 0.5%, to $17.63. But earnings are up just $17.63. But earnings are up just 3.8% from a year ago, 3.8% from a year ago, suggesting that wage pressures suggesting that wage pressures are in check. That gives the are in check. That gives the Federal Reserve additional Federal Reserve additional leeway to cut interest rates at leeway to cut interest rates at next Tuesday's meeting. next Tuesday's meeting.

Source: Wall Street Journal

Source: http://online.wsj.com/article/SB119703361873717116.html?mod=theafternoonreport



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TODAY’S MARKET REACTION? TODAY’S MARKET REACTION? Investors reacted by sending stocks Investors reacted by sending stocks

plunging and by plunging and by bidding upbidding up Treasury Treasury bond pricesbond prices. The . The Dow IndustrialsDow Industrials fell fell more than 200 points in a matter of more than 200 points in a matter of minutes and kept sinking through the minutes and kept sinking through the afternoon, closing off more than 294 afternoon, closing off more than 294 points, or points, or 2.1 percent2.1 percent, for the day, , for the day, according to preliminary figures. according to preliminary figures. Broader indexes like the Standard & Broader indexes like the Standard & Poor's 500 and the Nasdaq Poor's 500 and the Nasdaq Composite fared even worse.Composite fared even worse.

Dow Jones Industrials (30)Source: New York TimesSource:

http://www.nytimes.com/2007/12/11/business/11cnd-fed.html?hp



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Problem Set #2 Problem Set #2

TUTORIAL - CheersTUTORIAL - Cheers

Let’s work on Problem Set Let’s work on Problem Set #2 in class for a while at #2 in class for a while at least.least.

U.S. Males around New U.S. Males around New Years call this College Years call this College BOWL TIMEBOWL TIME

See ESPNSee ESPN BOWLING TIME!!! (College - American Football)

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Financial Institutions and Markets FIN 304 Dr. Andrew L. H. Parkes Day 4 “How do financial markets work?” 卜安吉