Macro for the Markets

8/8/2019 Macro for the Markets

1/15

MACRO FOR MARKETS

mfglobal.com

Near-4% Growth + Tame InflationThe budget deal reached between the President and Republican leaders reinforces our forecast

for reasonably strong growth and a gradual downtrend in unemployment in 2011. Indeed, while

we had expected most of the expiring provisions in the agreement to be extended, and those

extensions will merely avert a drag on growth, the payroll tax cut will add some new stimulus.

Consequently, we are raising our 2011 growth forecast modestly, to 3.9% from 3.7% (on a Q4/Q4

basis). We expect growth will continue at close to a 4% pace in 2012 (3.9% again). We expect

that growth rate will generate a 200,000 per month or more pace in payrolls gains by mid-2011,

with the unemployment rate falling to (a still high) 8.8% in Q4 of 2011 and 8.0% in Q4 of 2012.

We continue to expect inflation to remain tame, held down by significant slack, even as the

amount of slack gradually declines. A still-high unemployment rate and tame inflation will likely

allow the Fed to be patient in unwinding stimulus; we forecast a still-low 1.5% funds rate at the

end of 2012. (Some tightening will likely also come via Fed balance sheet shrinkage in 2012; we

still expect the $600 billion purchase program to be completed.) Despite the slight upgrade to our

growth forecast, we have pushed back the first increase in the funds rate to Q1 of 2012 from Q4

of 2011. The change reflects a slight reassessment of Fed officials reaction function.

Preview: FOMC on Autopilot; Mostly Positive Growth Data; Weak Core CPIWe do not expect any new initiatives or significant change in tone in the FOMC statement, other

than some acknowledgment that recent growth data have been encouraging; policy is likely to be

on autopilot for the next few months. We forecast fairly positive data on retail sales, housing

starts, and leading indicators, but weak industrial production data. We forecast a flat core CPI.

Virtually the entire 72 bp rise in nominal 10-year Treasury yields since Fed officials

announced the new purchase program on November 3 has been in real rates; break-even

inflation (BEI) rates have risen just 3 bps since then.

*Treasury Inflation-Protected Securities (TIPS)**Break-even inflation (BEI) rate = nominal Treasury yield minus (real) TIPS yieldSource: Federal Reserve Board

Economic Analysis | US

JAMES F. OSULLIVAN STEPHANIE S. CHENG

Chief Economist Economist

+1 212 589 6479 +1 212 589 6373

[email protected] [email protected]

CONTENTS

Pg. 2 | Near-4% Growth + TameInflation

Pg. 7 | Forecast Summary

Pg. 8 | Data Preview

Pg. 15 | Calendar

DECEMBER 10, 2010 INSTITUTIONAL USE ONLY MF Global Weekly Report

0.0

1.1

2.2

3.3

4.4

Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10

Nominal 10-year Treasury 10-year TIPS* (real) 10-year BEI**

%

Nov 2-3FOMC

Dec 10


2/15


12/10/2010 |MACRO FOR MARKETS

NEAR-4% GROWTH + TAME INFLATION

The budget deal reached between the President and Republican

leaders reinforces our forecast for reasonably strong growth and

a gradual downtrend in the unemployment rate in 2011. Indeed,

while we had expected most of the expiring provisions in the

agreement to be extended, and those extensions will merely averta drag on growth, the two-point payroll tax cut will add some new

stimulus. Consequently, we are raising our 2011 growth forecast

modestly, to 3.9% from 3.7% (on a Q4/Q4 basis). (The details

may change slightly, but we are assuming enough support for the

agreement in Congress to ensure passage.)

We expect growth will continue at close to a 4% pace in 2012

(3.9% again), with a reversal of the boost from the one-year

payroll-tax cut offset by improving underlying momentum. The

projection for 2012 is now included in our regular forecast table

(see page 7). We expect that GDP growth rate will generate a

200,000 per month or more pace in payrolls gains by mid-2011,

with the unemployment rate falling from 9.8% in the most recent

report to (a still high) 8.8% in Q4 of 2011 and 8.0% in Q4 of 2012.

(The 8.8% figure for Q4 of 2011 is unchanged from our earlier

forecast, with the boost to our GDP forecast offset by a higher

starting point for the unemployment rate after a reported 0.2 point

rise in the November 2010 report one week ago.)

We continue to expect inflation to remain tame, held down by

significant slack, even as the amount of slack gradually declines.

We forecast a 1.1% pace for core PCE prices in 2011 (as before),

and 1.5% in 2012, up slightly from an estimated 0.9% in 2010 (all

on a Q4/Q4 basis). We expect headline inflation to run a few

tenths of a point stronger than core inflation, boosted by food andenergy prices.

A still-high unemployment rate and tame inflation will likely allow

the Fed to be patient in unwinding stimulus; we forecast a still-low

1.5% funds rate at the end of 2012. (Some tightening will also

come via Fed balance sheet shrinkage.) Despite the slight

upgrade to our growth forecast for the year ahead, we have

pushed back the first increase in the funds rate to Q1 of 2012

from Q4 of 2011. The change reflects a slight reassessment of

Fed officials reaction function, as suggested by their decision to

initiate a new asset purchase program recently.

The combination of near-4% growth, slightly rising but still verytame inflation, and an accommodative Fed should be conducive

to further fading of risk aversion in financial markets, with equities

continuing to rise and credit spreads continuing to fall.

Conversely, it suggests further gains in Treasury yields, albeit not

at the recent pace. We forecast a 3.8% level for 10-year Treasury

yields at the end of 2011 (no change from our previous forecast)

and 4.2% at the end of 2012.

The budget agreement between the President and Republican

leaders would raise the deficit significantly relative to the official

baseline, which reflects current legislation. However, most of the

measures would merely avert a drag on growth rather than add n

stimulusby extending expiring provisions. The main new source

stimulus is the proposed payroll tax cut, which would more than

offset the expiring Making Work Pay tax credit. A provision allowi

full expensing of equipment would have a sizable near-term impa

on the deficit, although tax revenues would merely be delayed. T

economic impact of such measures tends to be small.

impact on federal deficit, billions of dollars FY11 F

(1) MEASURES LARGELY EXTENDING CURRENT

TAXES/SPENDING275

"BUSH TAX CUTS" (FROM 2001 AND 2003) 99

OTHER EXTENSIONS 28

AMT ADJUSTMENT 86

ESTATE AND GIFT TAX MEASURES (HAD EXPIRED IN 2010) 5

EXTENDED UNEMPLOYMENT BENEFITS 59

(2) NEW MEASURES 123

2 PCT. PT. PAYROLL TAX CUT 67

EXPENSING OF CAPITAL EQUIPMENT (MAINLY, NOT

ENTIRELY NEW)55

(3) EXPIRING MEASURES

MAKING WORK PAY (MWP) CREDIT 29

TOTAL IMPACT ON DEFICIT RELATIVE TO CURRENT LAW (1 + 2)398

NET OF EXPIRING MEASURES 94

PAYROLL TAX CUT + MWP CREDIT 38

EXPENSING OF CAPITAL EQUIPMENT 55

Note: fiscal year (FY) 2011 ends on September 30, 2011Source: Joint Committee on Taxation, Congressional Budget Office, and MF Global

Growth has been accelerating, even without new stimulus.

Strengthening in the labor market has been signaled by

employment-based tax receipts.

*Monthly data for wage and salary income; four-week average of daily data for taxreceipts, with additional 5-day-average smoothing.Source: Bureau of Economic Analysis, Treasury Department, CongressionalBudget Office, and MF Global

-6

-3

0

3

6

9

12

-6

-3

0

3

6

9

12

00 01 02 03 04 05 06 07 08 09 10 11 12

Total wag e and salary income

Federal wi thheld employment-based taxes, adjusted for taxlaw changes

%y/y*

Oct

Dec 8


3/15



In the rest of this note, we briefly expand on some of the issues

touched on above, starting with the proposed budget agreement.

Budget Agreement Mainly Averts a Drag on Growth, But

Some New Stimulus

The table on page 2 shows the deficit implications of the

measures included in the proposed budget agreement. In total,

they would add about $400 billion per year to the deficit in both

FY11 and FY12, equivalent to more than 2.5% of GDP. However,

as noted, most of the measures represent a continuation of

current taxes and spending, with the agreement averting a drag

on growth rather than adding new stimulus. The main new

measures were the two-percentage point payroll tax cut and more

generous depreciation allowances for business investment on

equipment (full expensing on equipment purchased in 2011, 50%

in 2012).

The payroll tax cut would boost disposable income by around

$110 billion in calendar 2011. In the other direction, the Making

Work Pay (MWP) tax credit is not being renewed. (We thought it

would be.) In effect, the payroll tax cut is replacing the MWP

credit. While the MWP credit is worth about $60 billion per year,

only about $45 billion of the boost to disposable income would

have come through tax withholding in 2011, with the other $15

billion via tax refunds in 2012. Combining the payroll tax cut with

the expiring MWP credit, we estimate the net boost to disposable

income in calendar 2011 is $65 billion, or about 0.4% of GDP.

Conversely, unless the payroll tax cut is extended, disposable

income would be depressed by its absence in 2012.

The effect on output from the temporary payroll tax cut will likely

be smaller than the impact on disposable income, reflecting

leakage through increased imports and higher saving as well as

some offset from higher market interest rates. (At least some of

the recent climb in Treasury yields appears to be in reaction to

the agreement.) Still, at least some net boost to growth in 2011 is

likely.

The 3.0% increase in real GDP in the first year of the current recovery figure was just half the norm after recessions in the 1960s, 1970

and 1980s, although it was still better than the 2.3% pace averaged at the starts of the last two recoveries. In those two cycles, which a

featured significant headwinds initially, as well as some bumps along the way, growth was stronger in the second year of recovery tha

the first year3.6% on average in Year 2 vs. 2.3% in Year 1. We forecast a 3.6% pace for the second year of the current recovery (10

through 11Q2) and 3.9% for the third year.

In contrast to overall GDP, equipment & software, and exports, showed historically strong growth in the first year of the current recover

Real consumer spending was unusually weak in the first year of the recovery, although it has been accelerating recently, helped by apickup in wage income.

%ch, sa, not annualized; inflation-

adjusted (real)GDP

FINALSALES

DOMESTICFINAL

SALES

INVENT.(pct. pts.contrib.)

CONSUMP-TION.

BUSINESSFIXED

INVEST.

NONRES.STRUCT.

EQUIP. &SOFTWARE

RESIDLINVEST.

EXPORTS G

AVERAGE OF FIVE RECESSIONS

IN 1960s, 70s, & 80s-2.1 0.1 -0.5 -68.1 0.9 -5.9 -3.6 -7.3 -14.0 1.8

FIRST YEAR OF RECOVERY 5.8 4.1 4.9 -28.0 4.9 5.8 0.2 9.5 21.5 0.2

SECOND YR OF RECOVERY* 4.9 4.8 5.4 -19.7 5.2 10.6 6.8 12.8 9.8 8.0

THIRD YEAR OF RECOVERY* 4.4 4.1 3.9 6.6 3.5 8.4 5.2 10.3 5.1 9.0

AVERAGE OF 1990-91 & 2001

RECESSIONS-0.3 0.2 0.1 -0.5 0.7 -5.9 -7.6 -5.1 -5.1 -4.6

FIRST YEAR OF RECOVERY 2.3 1.6 1.9 0.7 2.4 -4.5 -13.9 -0.6 11.0 7.2

SECOND YEAR OF RECOVERY 3.6 3.3 3.5 0.3 3.4 8.0 0.5 10.9 9.8 4.5

THIRD YEAR OF RECOVERY 3.3 3.1 3.7 0.2 3.8 8.1 -0.1 11.2 9.4 6.1

2008-09 RECESSION -4.1 -2.9 -4.4 -1.3 -2.4 -19.3 -18.4 -19.7 -36.2 -10.7 FIRST YEAR OF RECOVERY

(09Q3-10Q2)3.0 1.1 1.9 1.9 1.7 5.2 -15.6 15.7 4.9 14.1

MF FORECAST FOR SECOND

YEAR OF RECOVERY3.3 3.3 3.1 -0.1 3.2 7.4 0.2 10.1 -2.1 9.6

MF FORECAST FOR THIRD

YEAR OF RECOVERY3.9 3.9 3.6 -0.1 3.3 8.0 3.2 9.7 13.5 11.0

* Excluding second and third years after 1980 recession (when economy fell back into recession)Note: Calculated contractions in 1960 and 1969 recessions differ slightly from calculations based on official peak and trough quartersreflecting latest reported dataSource: Bureau of Economic Analysis, National Bureau of Economic Research, and MF Global


4/15



While the expensing provision will likely cause some equipment

spending to be accelerated into Q4 of 2011 from Q1 of 2012, the

swing will probably largely be absorbed in inventories, for little net

impact on GDP growth. Note that full expensing merely

accelerates depreciation allowances, which largely only lowers

the cost of capital to the extent the present value of a dollar in tax

deductions now is greater than the present value of a tax

deduction scheduled for later years. Certainly, past examples of

expensing show little evidence of significant growth effects.

Moreover, the impact will be further diluted in the current cycle by

low interest rates (i.e., lower discount rates for calculating present

values).

Growth Accelerating, Even Without New Stimulus: 10Q3

Growth Likely to be Revised to 3% Rate; Q4 Pace Potentially

Over 3%

Financial markets have largely shrugged off the weaker than

expected November employment report as an aberration

correctly, in our view. Indeed, as discussed last week, the weight

of evidence from a range of indicators points to growth

accelerating, with improvement extending to the labor market.

Most notable has been the improvement signaled by jobless

claims (including another decline in the latest week) and the ISM

data, although consumer confidence and spending indicators, tax

receipts, and export data have also been encouraging.

Upward revisions to inventory data point to about a 0.5 point

upward revision to the currently reported 2.5% rate of growth in

real GDP in Q3 (to 3.0%).

An export-led plunge in the trade deficit in October (to $38.7

billion from $44.6 billion) suggests upside risk to our 3.0%estimate for real GDP growth (at an annual rate) in the current

quarter. Still unclear is the extent to which a slowing in

inventory building will provide an offset.

The Michigan sentiment index rose to 74.2 in early December

from 71.6 in November and 67.7 in October.

Core Inflation Still Slowing

In contrast to the growth data, core consumer inflation data have

continued to slow. Nor do we expect the upcoming CPI report for

November to show a reversal. Indeed, we forecast another flat

m/m reading for core prices. (The consensus is looking for a 0.1%

m/m rise.)

FOMC on Autopilot

The anticipation level ahead of the upcoming FOMC meeting is

significantly lower than it was ahead of the momentous November

2-3 meeting (when the new asset purchase program was

announced). Nor do we expect any new initiatives or significant

change in tone this time, other than some acknowledgment that

recent growth data have been encouraging, on balance. Indeed,

policy is likely to be firmly on autopilot for at least a few months.

A composite ISM index, reflecting a weighted average of the

manufacturing and nonmanufacturing measures, rose to 55.2 in

November from 54.6 in October and 53.3, on average, in Q3.

Based on a regression of the index against GDP, a 55.2 level is

typically consistent with just over a 3% pace for real GDP.

*Economy-weighted average of manufacturing and non-manufacturing indexes(calculated by Haver Analytics)Note: Shaded bars represent periods of recession.Source: Institute for Supply Management, Haver Analytics, Bureau of EconomicAnalysis, and MF Global.

A payrolls-weighted composite ISM employment index rose to53.1 in November from 51.5 in October; that level is typicallyconsistent with about a +123,000 per month trend in payrolls.However, based on a regression of payrolls against the two ISMemployment measures individually, the data look consistent witha 173,000 per month trend.

* Simple payrolls-weighted average of manufacturing and nonmanufacturing ISMemployment indexes: latest shares are 9% (manufacturing) and 91% fornonmanufacturing** Based on a 2003-09 regression of payrolls changes vs. the two individual ISMemployment indexes; the regression implies a 30% weight for manufacturing and70% for nonmanufacturing.Note: Shaded bars represent periods of recession.Source: Institute for Supply Management, Bureau of Labor Statistics, and MFGlobal

3/1 /9 8 3/1/9 9 3/1/00 3 /1 /01 3/1 /02 3/1/03 3/1/04 3 /1/05 3 /1/0 6 3/1/0 7 3/1/08 3/1/09 3/1 /1 0 3/1/1 1 3/1/12

-8

-4

0

4

8

30

39

48

57

66

98 00 02 04 06 08 10 12

Co mp osite ISM* (l) Real GDP (r)

index, sa %q/q, saar

Nov

Q3

0 1 0 1 0 1 0 1 0 1 0 1 0 2 0 2 0 2 0 2 0 2 0 2 0 3 0 3 0 3 0 3 0 3 0 3 0 4 0 4 0 4 0 4 0 4 0 4 0 5 0 5 0 5 0 5 0 5 0 5 0 6 0 6 0 6 0 6 0 6 0 6 0 7 0 7 0 7 0 7 0 7 0 7 0 8 0 8 0 8 0 8 0 8 0 8 0 9 0 9 0 9 0 9 0 9 0 9 1 0 1 0 1 0 1 0 1 0 1 0 1 1 1 1 1 1 1 1 1 1

-800

-600

-400

-200

0

200

400

30

35

40

45

50

55

60

01 02 03 04 05 06 07 08 09 10 11

Simple composite ISM employment* (l)

Payrolls ex census (3-month average, r)

Mod el estimate for p ayrolls based on reg ression of

ISM emplo yment data** (r)

index, sa ch, 000s, sa

Nov


5/15



While the pickup in growth and the budget deal lessen the

likelihood that Fed officials will expand or extend their $600 billion

purchase program, lingering doubts about the recovery, the high

unemployment rate, and still-decelerating core inflation all argue

for officials at least following through on what they have already

announced. (We expect the Fed to complete the $600 billion

program, but no more than that.)

Recent Surge in Treasury Yields Mainly Reflects Higher Real

Yields, Not Inflation Expectations

We believe Fed officials are highly unlikely to scale back the $600

billion program unless inflation expectations measures surge.

That has not happened yet, with virtually all of the rise in Treasury

yields since the purchase program was announced on November

3 accounted for by the real portion, as proxied by yields on

Treasury Inflation-Protected Securities (TIPS). The change in

inflation expectations, as proxied by changes in break-even

inflation (BEI) rates, has been minimal. (The BEI rate is the

difference between nominal Treasury yields and TIPS yields;

while BEI rates are not pure inflation expectations measures,

changes in BEI rates are likely dominated by changes in inflation

expectations.)

Of the 72 bp rise in 10-year Treasury yields since the close on

November 2 (to 3.35% from 2.63%), 69 bps has come from real

yields (to 1.18% from 0.49%), with 10-year BEI rates up just 3 bps

since then (see chart). While BEI rates remain up noticeably from

a few months ago, with the climb starting after the Fed chairmans

Jackson Hole speech in August, the rise has merely reversed

what was an unwelcome decline in earlier months, with levels

back to around where they were on average in previous years.

We do not viewing the recent rise in Treasury yields as evidence

that the Feds purchase plan has not had any effect. However, the

pattern does highlight the limited significance of a $600 billion

program. Other factors, including the growth data, are much more

important. Indeed, based on the New York Feds analysis of the

first round of asset purchases, a $600 billion purchase program

could only be expected to lower 10-year yields by around 20 bps1.

We suspect rates would be slightly higher now without the

purchase program.

1Large-Scale Asset Purchases by the Federal Reserve: Did They Work?, by

Joseph Gagnon, Matthew Raskin, Julie Remache, and Brian Sack (March 2010)

The core CPI and the core PCE price index have continued to

show slowing in recent months.

Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Federal Reserve

Board, and MF Global

Virtually the entire 72 bp rise in nominal 10-year Treasury yields

since Fed officials announced the new purchase program on

November 3 has been in real rates; break-even inflation (BEI)

rates have risen only marginally since then. BEI rates remain up

from where they were in late August, although they are generally

just back to average levels from recent years.

*Treasury Inflation-Protected Securities (TIPS)**Break-even inflation (BEI) rate = nominal Treasury yield minus (real) TIPS yieldSource: Federal Reserve Board

0

1

1

2

2

3

3

4

4

0

1

2

3

4

07 08 09 10 11Core PCE prices (y/y)

Core CPI (y/y)

TIPS 5-year, 5-year fo rward inflation compensation

%

Dec 7

Oct

0.0

1.1

2.2

3.3

4.4

Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10

Nominal 10-year Treasury10-year TIPS* (real)10-year BEI**

%

Nov 2-3FOMC

Dec 10


6/15



FOMC StatementsNovember 3, 2010 versus September 21, 2010 (New wording is highlighted in bold)

Information received since the Federal Open Market Committee met in September August confirms indicates that the pace ofrecovery in output and employment continues to be has slowed in recent months. Household spending is increasing gradually,but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Businessspending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidentialstructures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts continue to be are at adepressed level. Longer-term inflation expectations have remained stable, but measures of underlying inflation havetrended lower in recent quarters. Bank lending has continued to contract, but at a reduced rate in recent months. TheCommittee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace ofeconomic recovery is likely to be modest in the near term.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.Currently, the unemployment rate is elevated, and mMeasuresof underlying inflation are somewhat low currently at levelssomewhat below those, relative to levels that the Committee judges to be consistent, over the longer run, with its dualmandate.to promote maximum employment and price stability. Although the Committee anticipates a gradual return to

higher levels of resource utilization in a context of price stability, progress toward its objectives has beendisappointingly slow. With substantial resource slack continuing to restrain cost pressures and longer-term inflationexpectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistenwith its mandate.

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistentwith its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain itsexisting policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends topurchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace ofabout $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overallsize of the asset-purchase program in light of incoming information and will adjust the program as needed to bestfoster maximum employment and price stability.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that

economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, arelikely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee also will maintain itsexisting policy of reinvesting principal payments from its securities holdings.

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools asnecessary is prepared to provide additional accommodation if needed to support the economic recovery and to help ensurethat return inflation, over time, is at to levels consistent with its mandate.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; JamesBullard; Elizabeth A. Duke; Sandra Pianalto; Sarah Bloom Raskin; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh;and Janet L. Yellen.

Voting against the policy was Thomas M. Hoenig. Mr. Hoenig believed the risks of additional securities purchases

outweighed the benefits. Mr. Hoenig also was concerned that this continued high level of monetary accommodationincreased the risks of future financial imbalances and, over time, would cause an increase in long-term inflationexpectations that could destabilize the economy., who judged that the economy continues to recover at a moderate pace.Accordingly, he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for anextended period was no longer warranted and will lead to future imbalances that undermine stable long-run growth. In addition,given economic and financial conditions, Mr. Hoenig did not believe that continuing to reinvest principal payments from itssecurities holdings was required to support the Committees policy objectives.


7/15



MF GLOBAL U.S. ECONOMIC FORECAST SUMMARY

% change from previous period, annual rate (ar), except where noted;forecasts in bold

2010 2011 CALENDAR AVERAGE Q4/Q4

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2010 2011 2012 2010 2011 EAL GDP 3.7 1.7 2.5 3.0 3.8 3.8 4.0 4.0 2.8 3.4 3.9 2.8 3.9

FINAL SALES 1.1 0.9 1.2 4.2 4.1 3.9 4.0 4.5 1.3 3.5 3.9 1.8 4.1

DOMESTIC FINAL SALES 1.3 4.3 2.9 2.3 3.7 3.5 3.6 4.1 1.8 3.4 3.6 2.7 3.7

NET EXPORTS (pct pt contr) -0.3 -3.5 -1.8 1.7 0.2 0.2 0.2 0.2 -0.6 0.0 0.1 -1.0 0.2

INVENTORIES (pct pt contr) 2.6 0.8 1.3 -1.1 -0.3 -0.1 0.0 -0.4 1.5 -0.1 0.0 0.3 -0.2

CONSUMPTION 1.9 2.2 2.8 3.0 3.7 3.3 3.2 3.5 1.7 3.2 3.4 2.5 3.4

BUSINESS FIXED INVESTMENT 7.8 17.2 10.3 4.5 7.9 7.1 8.9 11.1 5.6 8.3 7.6 9.8 8.7

STRUCTURES -17.8 -0.5 -5.8 3.0 2.0 2.0 3.0 3.0 -14.2 1.2 3.3 -5.6 2.5

EQUIPMENT & SOFTWARE 20.5 24.8 16.8 5.0 10.0 9.0 11.0 14.0 15.2 10.9 9.1 16.5 11.0

RESIDENTIAL INVESTMENT -12.3 25.6 -27.5 1.0 12.0 12.0 12.0 12.0 -3.1 4.8 13.9 -5.2 12.0

EXPORTS 11.4 9.1 6.3 10.0 11.0 11.0 11.0 11.0 11.8 10.1 11.0 9.2 11.0

IMPORTS 11.2 33.5 16.8 -3.0 7.0 7.0 7.0 7.0 13.4 7.6 7.6 13.9 7.0

GOVERNMENT -1.6 3.9 4.0 -0.8 1.0 1.6 1.6 1.9 1.1 1.4 1.6 1.4 1.5

INVENTORIES (ch $bil ar) 44 69 112 76 67 65 66 51 75 62 57 76 51

PI 1.5 -0.7 1.5 1.8 1.1 1.2 1.3 1.4 1.6 1.2 1.2 1.0 1.3

CORE CPI 0.0 0.9 1.2 0.4 0.8 0.9 1.0 1.2 1.0 0.9 1.3 0.6 1.0

ORE PCE PRICES 1.2 1.0 0.8 0.5 1.0 1.0 1.1 1.2 1.4 0.9 1.5 0.9 1.1

NEMPLOYMENT (%, level) 9.7 9.7 9.6 9.7 9.5 9.2 9.0 8.8 9.7 9.1 8.3 9.7 8.8

EDERAL BUDGET BAl($bil, fy) -1294 -1450 -1150

% OF GDP -9.2 -9.5 -7.2

NTEREST RATES (%, level, eop) End of year

FED FUNDS TARGET 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.1 0.1 1.0 0.13 0.13

2-YEAR TREASURY 1.0 0.6 0.4 0.6 0.7 1.0 1.3 1.5 0.7 1.1 2.2 0.6 1.5

10-YEAR TREASURY 3.8 3.0 2.5 3.2 3.4 3.6 3.7 3.8 3.1 3.6 4.1 3.2 3.8

Source: Bureau of Economic Analysis, Bureau of Labor Statistics, US Treasury, Federal Reserve Board, and MF Global

FORECAST SUMMARY

We forecast a 3.9% pace for real GDP in 2011 (Q4/Q4). We also

see upside risk to our 3.0% estimate for the quarterly pace in Q4

of 2010. Meanwhile, new inventory data point to a likely upward

revision to the currently reported 2.5% pace for Q3 of 2010 (to

around 3.0%).

We believe the recent slowdown was just a temporary loss of

momentum, due in large part to an overreaction in global financialmarkets to the financing difficulties of a few small countries in

Europe earlier this year. We believe conditions remain in place for

above-trend growth in the year ahead: monetary policy is highly

stimulative (with the purchase program adding a little to that

stimulus); the financial system has been recovering, with the

credit crunch thawing; and global growth still looks solid.

Businesses have already stepped up investment in equipment

and software sharply and employment growth modestly, while the

drag from nonresidential construction has begun to fade. We

believe the pluses will ultimately dominate, even as household

deleveraging continues and the boosts from fiscal stimulus and

the inventory cycle fade.

While we believe ample slack will keep inflation tame, we expect

deflation will be averted by a sustained pickup in growth. We

expect the pace in the core PCE price index to edge up from

0.9% in 2010 to 1.1% in 2011 and 1.5% in 2012 (Q4/Q4).

A still-high (but declining) unemployment rate and tame inflation

will likely allow the Fed to be patient in unwinding stimulus; we

forecast a still-low 1.5% funds rate at the end of 2012, with the

first increase in Q1 of 2012. (Some tightening in 2012 will likely

also come via Fed balance sheet shrinkage.) We expect Treasury

yields will rise some more, with 10-year yields up to 3.8% at the

end of 2011 and 4.2% at the end of 2012.


8/15



DATA PREVIEW

NFIB SMALL BUSINESS SURVEY (TUE, DEC 14, 07:30)

sa AUG SEP OCT NOV

OPTIMISM INDEX (sa) 88.8 89.0 91.7

HIRING PLANS (net %) 1 -3 1 4

CREDIT HARDER TO GET (net %) 12 14 11

Source: National Federation of Independent Business (NFIB)

The NFIB small business optimism index is historically low, even

with the three consecutive increases, although GDP has

consistently shown less weakness than implied by the NFIB index

recently (see chart). In part, the divergence likely reflects larger

credit crunch effects for small businesses than large businesses,

although we believe the NFIB index has also overstated

weakness in the small business sector recently.

The relationship between GDP growth and the NFIB index has

broken down in the current cycle, with much less weakness in

growth than implied by the index.

Note: Shaded bars represent periods of recession.Source: National Federation of Independent Business (NFIB), Bureau of EconomicAnalysis, and MF Global

The core finished goods PPI was up 1.5% y/y in October, up alittle from the 0.9% pace at the end of 2009.

Source: Bureau of Labor Statistics

WEEKLY STORE SALES (TUE, DEC 14, 07:45/08:55)

NOV 20 NOV 27 DEC 4 DEC 1

WEEKLY ICSC, %w/w, sa -0.6 0.5 -2.1

WEEKLY ICSC, %y/y 2.8 3.5 2.6

REDBOOK, %y/y 2.5 4.9 3.8

OCT NOVDEC

THRU 4DE

THRU 1

WEEKLY ICSC, %m/m, sa -0.4 1.1 -2.0

REDBOOK, %m/m, sa 0.2 0.6 0.6

MONTHLY ICSC, %m/m, sa -0.8 0.2

WEEKLY ICSC, %y/y 2.1 3.3 2.6

REDBOOK, %y/y 2.6 3.2 3.8

MONTHLY ICSC, %y/y 1.6 5.4

Note: monthly data are based on the retail industry's fiscal calendar, the fiscal month

of December ends on January 1.Source: International Council of Shopping Centers, Instinet, and MF Global

The 2.1% w/w decline in the weekly ICSC index in the latest wee

more than reversed the 0.5% w/w rise in prior week, although at

least some of the decline may have reflected seasonal

adjustment problems. The index fell 1.3% w/w in the comparable

first week of December last year, and -0.8% w/w in 2008. (Both o

those declines were followed by increases in the following week.)

Meanwhile, the Redbook continues to signal a net pickup: it was

up 3.8% y/y in the latest week, a slowing from 4.9% y/y in the

prior week but up from 2.5% y/y two weeks ago.

According to an ICSC survey, consumers had completed 40% oftheir holiday shopping through December 5, below the 45% at the

same point in 2009. The pattern raises the potential for

strengthening from catch-up in coming weeks.

PRODUCER PRICE INDEX (TUE, DEC 14, 08:30)

NOV EST

seasonally adjusted unless notedAUG SEP OCT CONS MF

FINISHED GOODS (%m/m) 0.4 0.4 0.4 0.6 0.4CORE (EX FOOD & ENERGY) 0.1 0.1 -0.6 0.2 0.3

CORE INTERMEDIATE (%m/m) 0.1 0.2 0.6

CORE CRUDE (%m/m) 4.1 5.5 2.1

FINISHED GOODS (%y/y, nsa) 3.1 4.0 4.3 3.3 3.2

CORE (EX FOOD & ENERGY) 1.3 1.6 1.5 1.2 1.3

CORE INTERMEDIATE (%y/y, nsa) 4.2 4.0 4.4

CORE CRUDE (%y/y, nsa) 21.2 25.2 25.8

Source: Bureau of Labor Statistics, Bloomberg, and MF Global

-10

-5

0

5

10

74

84

94

104

114

80 83 86 89 92 95 98 01 04 07 10 13

NFIB index (l) Real GDP (r)

ind ex, sa

Q3

Oct

%q/q, saar

-9

-6

-3

03

6

9

12

04 05 06 07 08 09 10

Core finished goods PPI Core intermediate goods PPI

% y/y, nsa

Oct


9/15



The overall finished goods PPI probably rose fairly sharply again

in November, reflecting another sizable gain in energy prices as

well as a reversal of some of the auto-led plunge in core prices in

October. (Excluding motor vehicles, core finished goods prices

rose 0.2% m/m in October.) The auto components can beespecially volatile (and hard to predict) at the start of the new

model year. Through the volatility, the trend in core finished

goods prices looks tame, although the current 1.5% y/y reading is

up a little from 0.9% at the end of 2009.

RETAIL SALES (TUE, DEC 14, 08:30)

NOV EST

sa AUG SEP OCT CONS MF

TOTAL (%m/m) 0.9 0.7 1.2 0.6 0.3EX AUTOS 1.0 0.5 0.4 0.6 0.5

EX AUTOS & GAS 1.0 0.4 0.4 0.6 0.4EX AUT, BLDG MATS, & GAS 1.0 0.4 0.2 0.4

MOTOR VEHICLES & PARTS 0.2 1.5 5.0 -0.5

FURNITURE & FURNISHINGS 0.4 0.2 -0.7

ELECTRONICS AND APPLIANCES -1.0 1.4 -0.7

BLDG MATS, GARDEN EQUIP 1.3 1.3 1.9 0.5

FOOD & BEVERAGE 1.4 0.1 0.3

HEALTH & PERSONAL CARE 0.8 0.4 -0.1

GASOLINE STATIONS 1.6 1.2 0.8 1.0

CLOTHING & ACCESSORY 0.3 -0.4 0.7

SPORT, HOBBY, BOOKS, MUSIC 0.9 0.9 1.0

GENERAL MERCHANDISE 0.6 0.1 0.2

MISCELLANEOUS 0.9 1.3 -0.6

NONSTORE RETAILERS 1.8 1.4 0.8

FOOD & DRINKING PLACES 0.8 0.0 0.3

TOTAL (%y/y) 4.2 7.4 7.3 5.7EX AUTOS 5.3 5.5 6.0 4.7

EX AUTOS & GAS 4.9 5.1 5.2 4.8EX AUT, BLDG MATS, & GAS 4.8 4.8 4.6 4.4

Source: Bureau of the Census, Bloomberg, and MF Global

Total retail sales were probably held back in November by a

reversal of some of the surge in the auto component in October.

(The more reliable unit data showed no change, but the auto

component of retail sales was stronger than seemed consistent

with the unit data in October.) Excluding autos, sales probably

continued to rise solidly, even with less of a boost from the price-

dominated gasoline component than in October. (The data are

nominal.) We estimate our forecast is consistent with total real

consumption (including services) growing at about a 3.0% annual

rate so far in Q4 (through November), up from a 2.8% pace in Q3.

The Q3 pace was the strongest (least weak) since 2006.

Industrial commodity prices have been surging, consistent with a

continued uptrend in the core crude goods PPI.

Source: Bureau of Labor Statistics and Commodity Research Bureau

BUSINESS INVENTORIES (TUE, DEC 14, 10:00)OCT EST

sa JUL AUG SEP CONS MF

INVENTORIES (%m/m) 1.1 0.9 1.3 1.0 1.0

SALES (%m/m) 0.8 0.3 0.7 1.3

INVENTORY/SALES RATIO 1.26 1.27 1.28 1.27

Source: Census Bureau, Bloomberg, and MF Global

Nominal inventory growth does not appear to have slowed much

in October relative to the 1.1% per month pace in Q3, although a

pickup in commodity prices suggests more slowing in real terms.Nominal manufacturing and wholesale inventories have already

been reported up 0.9% m/m and 1.9% m/m, respectively, in

October. Our 1.0 % m/m estimate for total inventories

incorporates a 0.5% m/m rise in the retail sector.

MORTGAGE APPLICATIONS (WED, DEC 15, 07:00)

MBA indexesPURCHASE

INDEXREFI INDEX 30-YEAR

MORTGAGERATE %WKLY

4-WKAVG

WKLY 4-WK AVG

NOV 13 179.2 180.8 3831.0 4343.4 4.46

NOV 20 205.0 188.0 3793.6 4135.3 4.50

NOV 27 207.2 195.0 2974.4 3796.7 4.56

DEC 4 210.9 200.6 2932.0 3382.8 4.66

DEC 11

Source: Mortgage Bankers' Association

In contrast to the refi index, the more important purchase index

has risen in the last three weeks, suggesting some improvement

in home sales.

300

360

420

480

540

600

150

200

250

300

350

400

04 05 06 07 08 09 10 11

Core crude goods PPI (l)

CRB spo t index: raw industrial materials (r)

index, sa

Oct

Dec 9

index, nsa


10/15



Mortgage rates have reversed some of their recent decline,

although levels are still low. The current 4.66% reading for 30-

year mortgage rates is up a little from the 4.52% average in Q3,

but it is down from 4.95% in H1, and 5.03% in all of 2009.

CONSUMER PRICE INDEX (WED, DEC 15, 08:30)

NOV EST

%m/m, sa, unless noted AUG SEP OCT CONS MF

TOTAL CPI 0.3 0.1 0.2 0.2 0.1FOOD 0.2 0.3 0.1 0.2ENERGY 2.3 0.7 2.6 0.5CORE 0.0 0.0 0.0 0.1 0.0CORE (before rounding) 0.046 0.001 -0.007

COMPONENTS

(% of core)

SHELTER (41.6%) 0.0 0.0 0.1

RESIDL RENT (7.7%) -0.1 0.1 0.1

OER (32.4%) 0.0 0.0 0.1

LODGING (1.0%) -1.3 -0.2 -1.0

FURNISH/OPS (5.9%) 0.0 -0.4 0.0

APPAREL (4.8%) -0.1 -0.6 -0.3

NEW VEHICLES (5.6%) 0.3 0.1 -0.2

USED VEHICLES (2.6%) 0.7 -0.7 -0.9

AIRFARES (1.0%) -0.1 0.2 0.2

MEDICAL CARE (8.4%) 0.2 0.6 0.1

RECREATION (8.3%) -0.2 -0.3 -0.1

EDUC, COMMUN (8.3%) 0.0 -0.1 -0.1

OTHER (4.5%) 0.3 -0.1 -0.3

TOTAL CPI (%y/y, nsa) 1.1 1.1 1.2 1.1 1.1

CORE 0.9 0.8 0.6 0.6 0.6

GOODS 1.3 0.8 0.1

SERVICES 0.7 0.8 0.8

TOTAL CPI (index, nsa) 218.312 218.439 218.711 218.7

%m/m 0.1 0.1 0.1 0.0

Source: Bureau of Labor Statistics, Bloomberg, and MF Global

Total as well as core consumer inflation was likely weak in

November, with food and energy prices up marginally and core

prices flat again. The core CPI has risen at a 0.5% annual rate so

far in 2010 (October vs. December), or 0.0449% per month on

average (i.e., 0.0% after rounding).

The 0.5% annual rate for the core CPI so far in 2010 is down from

1.8% in 2009 (Dec-Dec). The sharp slowing reflects the

downward pressure from ample slack created by the recession.

The amount of slack will remain large for a while, even as it

declines. Still, we expect at least some offset in 2011 from a

pickup in growth. Most important, we expect further acceleration

in employment growth to boost the key rental components. The

rental components have already picked up slightly (see chart).

We expect the core CPI will rise 1.0% in 2011 (Q4/Q4), up slightl

from the current 0.6% y/y reading. We forecast a 1.3% pace for

the total CPI.

Retail food prices tend to be much less volatile than food

commodity costs. (The chart below has two scales.)

Nonetheless, a surge in food commodity costs is typically

reflected in some acceleration in the CPI.

Source: Bureau of Labor Statistics and U.S. Department of Agriculture

The core CPI and the core PCE price index have continued to

show slowing in recent months. Market-based inflation

expectations indicators have picked up relative to a few months

ago, although they show little change in the past month and are

merely back to typical levels from recent years.

Source: Bureau of Economic Analysis, Bureau of Labor Statistics, and the FederalReserve Board

-1

1

3

5

7

-26

-13

0

13

26

00 02 04 06 08 10

Farm p ro duct prices (l) CPI: Fo od (r)

% y/y, both scales

Oct

Nov

0

1

1

2

2

3

3

4

4

0

1

2

3

4

07 08 09 10 11Core PCE prices (y/y)

Core CPI (y/y)TIPS 5-year, 5-year fo rward inflation compensation

%

Dec 7

Oct


11/15



The key rental components of the core CPI have accelerated

modestly this year.

Source: Bureau of Labor Statistics

N.Y. FED MANUFACTURING SURVEY (WED, DEC 15, 08:30)DEC EST

indexes, sa SEP OCT NOV CONS MF

CURRENT ACTIVITY 4.1 15.7 -11.1 5.0 10.0

NEW ORDERS 4.3 12.9 -24.4

EMPLOYMENT 14.9 21.7 9.1

PRICES PAID 22.4 30.0 22.1

PRICES RECEIVED 1.5 8.3 -2.6

6-MONTH OUTLOOK 31.3 40.0 54.6

6-MONTH CAPEX PLANS 25.4 25.0 23.4

Source: Federal Reserve Bank of New York, Bloomberg, and MF Global

The plunge in the New York Fed current activity index in

November was not corroborated by other manufacturing surveys.

We expect the December report to show a reversal.

TREASURY INTERNATIONAL CAPITAL SYSTEM (WED, DEC 15, 09:00)billions of dollars, nsa JUL AUG SEP OCT

TOTAL NET INFLOWS 79.8 11.2 81.7

NET LONG-TERM SECURITIES 61.2 128.7 81.0

NET FOREIGN, US RESIDENTS* -12.6 -7.9 -10.4

NET BY NON-US RESIDENTS 73.8 136.6 91.4

TREASURY BONDS & NOTES 30.0 117.1 78.3

PRIVATE 21.3 85.7 38.8

OFFICIAL 8.7 31.5 39.5

GOVT AGENCY BONDS 17.3 4.6 -8.2

PRIVATE 21.5 12.9 23.2

OFFICIAL -4.2 -8.3 -31.4

CORPORATE BONDS 13.9 10.0 0.6

PRIVATE 14.1 10.1 0.2

OFFICIAL -0.1 -0.1 0.3

EQUITIES 12.5 4.8 20.7

PRIVATE 12.2 4.5 21.5

OFFICIAL 0.3 0.4 -0.8

OTHER LONG-TERM SECURITIES -17.2 -16.9 -22.7

SHORT-TERM SECURITIES 43.1 -0.2 -24.9

TREASURY BILLS 33.8 28.9 -24.6

CHANGE IN BANKS' NET

LIABILITIES-7.2 -100.5 48.3

*Negative sign for outflow. Source: Treasury Department

Net purchases of Treasury securities slowed a little in Septemberafter the surge in August. They probably slowed again in October

INDUSTRIAL PRODUCTION (WED, DEC 15, 09:15)NOV EST

sa AUG SEP OCT CONS MF

TOTAL PRODUCTION (%m/m) 0.2 -0.2 0.0 0.3 0.0

MANUFACTURING 0.0 0.1 0.5 0.0

EX AUTOS 0.4 0.1 0.5 0.3

CAPACITY UTILIZATION (%) 74.9 74.8 74.8 75.0 74.8

MANUFACTURING 72.2 72.3 72.7 72.7

Source: Federal Reserve Board, Bloomberg, and MF Global

Industrial production was probably held down in November by

declines in motor vehicles and utilities. Nonauto manufacturing

output likely rose modestly, held down by the surprisingly weak

data in the employment report (which is used for some source

data). The manufacturing ISM index is signaling a solid trend in

manufacturing output growth.

-1

0

1

2

3

4

5

6

01 02 03 04 05 06 07 08 09 10

CPI: owners ' equivalent rentCPI: rent of primary residence

% ch from 3 mon ths earlier, saar

Oct


12/15



HOUSING MARKET INDEX (HMI) (WED, DEC 15, 10:00)

DEC EST

SEP OCT NOV CONS MF

HOUSING MARKET INDEX 13 15 16 16 16

CURRENT SALES 13 16 16

EXPECTED SALES 18 23 25

HOMEBUYER TRAFFIC 9 11 12

Source: National Association of Homebuilders, Bloomberg, and MF Global

While the post-tax-credit decline in the HMI likely exaggerated

underlying weakness in housing, activity still looks fairly weak.

The trend-setting housing market index has risen a ittle in the

last two months, although the level is still low.

Source: Bureau of the Census and National Association of Home Builders

The homebuilder portion of the S&P 500 was roughly flat

between early November and early December (coinciding with

the timing of the homebuilder survey).

Source: Standard & Poors and National Association of Home Builders

JOBLESS CLAIMS (THU, DEC 16, 08:30)

NEW CLAIMS (000s, sa) CONTINUING CLAIMS (000s)

WKLY4-WKAVG

REGULAR EXTENDED* TOT

sa nsa sa** sa*NOV 6 437 447 4324 4665 5399 97

NOV 13*** 441 444 4217 4900 5338 95

NOV 20 410 437 4277 4507 5259 95

NOV 27 438 432 4086

DEC 4 421 428

DEC 11 CONS 425 424

MF 425 424

*Sum of federal extended and emergency claims**Using seasonal factors for regular continuing claims***Sample week for employment reportSource: Department of Labor, Bloomberg, and MF Global

While the precise relationship between the level of claims and thepace in payrolls has changed in the current cycle, sustained ups

and downs in claims have continued to reliably signal relative

weakening and strengthening, respectively, in the labor market.

At 428,000, the four-week average is down from 467,000, on

average, in Q3.

This chart shows regression-based estimates of the level of

claims consistent with zero growth in (ex-census) payrolls.Based on five- and 10-year regressions, the level of the dividing

line is just under 400,000 (around 390,000). However, the one-

year regression currently shows a 480,000 level.

Note: Shaded bars represent periods of recession.Source: Department of Labor and MF Global

250

400

550

700

75 78 81 84 87 90 93 96 99 02 05 08

1-year regression 5-year regression10-year regression

impl ied dividing line for i nitial claims between rising and falling ex-census payrolls, 000s per week, sa

Q3

070101 080101 090101 100101

0

265

530

795

1060

07 08 09 10

6

16

26

36

46

Housing market index (r)

S&P 500: homebuilding index (l)

index, both scales

Dec 10

Nov

4

22

40

58

76

250

550

850

1150

1450

03 04 05 06 07 08 09 10 11

New single-family home sales (l)

Housing market index (r)

000s, saar ind ex, sa

Oct

Nov


13/15



The regular continuing claims series has become virtually

useless as an indicator recently, with a roughly 2.5 million

plunge since mid-2009 largely reflecting exhaustions

(individuals losing eligibility before finding a job). The broader

seasonally adjusted series we calculate, including extended

benefits, has been more relevant. It has generally shown a

roughly flat trend this year, consistent with the unemployment

rate until November, but it has moved down recentlyin

contrast with the 0.2 point rise in the unemployment rate in the

November employment report. It plunged temporarily a few

months ago when the extended unemployment benefits

program temporarily expired, but then bounced back when the

program was renewed.

Note: extended claims are seasonally adjusted using seasonal factors for regularcontinuing claims. Source: Department of Labor and MF Global

HOUSING STARTS AND PERMITS (THU, DEC 16, 08:30)NOV EST

000s, saar AUG SEP OCT CONS MF

STARTS 614 588 519 550 555

SINGLE-FAMILY 432 441 436

MULTIFAMILY 182 147 83

PERMITS 571 547 552 560 565

SINGLE-FAMILY 403 402 404

MULTIFAMILY 168 145 148

Source: Census Bureau, Bloomberg, and MF Global

Housing starts probably continued their recent up-and-down

pattern with a rise in November, led by the volatile multifamilysector. Through the volatility, the data show little net change

recently. Starts have averaged a 593,000-unit annual rate so far

this year, up slightly from the 554,000-unit pace averaged in

2009.

The recovery in starts has been and probably will continue to be

restrained by still-high inventories of vacant existing homes; we

estimate the excess is currently around three million homes

(based on the differential with the average vacancy rate in the

1990s). Those inventories are likely to trend lower in coming

quarters. The current pace in starts is probably close to one

million (at an annual rate) below the long-term trend based on

household formation and replacement building, consistent with aclear downtrend in inventories of vacant homes over time. The

lack of decline so far, despite that arithmetic, has reflected what

appears to be a largely cyclical slowing in household formation.

Housing starts likely bottomed in early 2009, although the net rise

since then has been minimal.

Source: Census Bureau

PHILADELPHIA FED MANUFACTURING SURVEY (THU, DEC 16, 10:00)DEC EST

indexes, sa SEP OCT NOV CONS MF

CURRENT ACTIVITY -0.7 1.0 22.5 14.5 19.0

NEW ORDERS -8.1 -5.0 10.4

EMPLOYMENT 1.8 2.4 13.3

PRICES PAID 9.8 31.5 34.0

PRICES RECEIVED -13.9 -9.0 -2.1

6-MONTH OUTLOOK 26.3 41.0 49.0

6-MONTH CAPEX PLANS 11.6 21.4 20.2

Source: Federal Reserve Bank of Philadelphia, B loomberg, and MF Global

The Philadelphia Fed current activity index probably held ontomost of last months surge, consistent with the improvement

being signaled by most manufacturing surveys. The 22.5 reading

in November matched the highest level since 2005.

400

900

1400

1900

2400

05 06 07 08 09 10

Housing starts Housing permits

000s, saar

Oct

J J J J J J

2

5

8

1114

17

2

5

8

1114

17

Jan -08 Jul-08 Jan -09 Jul-09 Jan -10 Jul-10

Regular continuing claimsRegular + emergency/federal extended continuing claimsTotal unemplo ed in emplo ment report

millions, sa

Nov

Nov 27

Nov 20


14/15



CURRENT ACCOUNT (THU, DEC 16, 08:30)10Q3 EST

09Q4 10Q1 10Q2 CONS MF

BALANCE ($bil, saqr) -100.9 -109.2 -123.3 -126.0 -125.5% of GDP -2.8 -3.0 -3.4 -3.4

Source: Bureau of Economic Analysis, Bloomberg, and MF Global

The current account deficit was probably close to flat in Q3,

similar to the pattern already reported in the monthly goods and

services data. The deficit remains down sharply from the peak of

6.5% of GDP in Q4 of 2005, although the share was as low as

2.4% in Q2 of 2009.

FED BALANCE SHEET (THU, DEC 16, 16:30)

billions of dollars unless noted, nsa NOV 24 DEC 1 DEC 8 DEC 9

TOTAL FED ASSETS 2349 2350 2385

%y/y 6.3 6.5 8.9

SECURITIES HELD OUTRIGHT 2087 2088 2120

US TREASURIES 901 917 950

FEDERAL AGENCY 148 148 148

MORTGAGE-BACKED 1038 1023 1023

TAF CREDIT 0 0 0

OTHER LOANS 47 47 46

PRIMARY CREDIT 1 0 0

CREDIT EXTENDED TO AIG 20 21 21

TALF 26 25 25

MAIDEN LANE LLC (I*, II**, &

III***)67 67 67

AIA AURORA LLC & ALICO

HOLDINGS LLC****26 26 26

CENTRAL BANK LIQY SWAPS 0 0 0

OTHER ASSETS 122 121 126

MONETARY BASE (2-wk avg) 1977 1977

% y/y -4.1 -4.1

* Bear Stearns assets. ** AIG CDO assets. *** RMBS assets. **** AIG equityholdings. Source: Federal Reserve Board

TheFeds $600 billion purchase plan will likely boost total Fedassets to around $2.9 trillion by mid-2011.

MONETARY AGGREGATES (THU, DEC 16, 16:30)

NOV 15 NOV 22 NOV 29 DEC 6

M1 (billions of $, saar) 1798 1817 1844

%ch from 13 weeks ago, saar 19.4 18.3 16.4

%y/y 6.7 7.7 9.2

M2 (billions of $, saar) 8799 8809 8812

%ch from 13 weeks ago, saar 7.6 7.5 6.2

%y/y 3.2 3.3 3.4

Source: Federal Reserve Board

The monetary aggregates have accelerated recently. In any

event, the relationship between monetary and credit measures

and economic activity as well as inflation tends to be highly

variable.

M2 has been accelerating recently.

Source: Federal Reserve Board

LEADING INDICATORS (FRI, DEC 17, 10:00)NOV EST

AUG SEP OCT CONS MF

LEADING INDEX (%m/m, sa) 0.1 0.5 0.5 1.1 1.2

%y/y 6.8 6.2 6.3 6.5

COINCIDENT INDEX (%m/m, sa) 0.0 0.0 0.1 0.0

%y/y 1.9 1.9 2.0 1.6Source: Conference Board, Bloomberg, and MF Global

The index of leading indicators appears to have surged in

November, led by boosts from the vendor performance, yield

curve, S&P 500, jobless claims, and real M2 components.

-3

0

3

6

9

12

15

18

06 07 08 09 10 11

From year ag o Fro m 13 weeks ag o

% ch i n M2, saar

Nov 29


15/15



Dec 6Dec 31MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY

6

(10:15-11:00) Fed purchase op(11:00) 4-wk BillAnnouncement(11:30) 3- & 6-mth Bill Auction(13:00) Richmond Feds Lacker

7

(07:45/08:55) Store Sales(10:00) Dec IBD/TIPP(10:00) Oct JOLTS(10:15-11:00) Fed purchase op(11:30) 4-wk Bill Auction(13:00) 3-yr Note Auction(15:00) Oct Consumer Credit

8

(07:00) Mortgage Apps(10:15-11:00) Fed purchase op(11:30) SFP Auction(13:00) 10-yr Note Auction

9

(08:30) Initial Claims(10:00) Oct Wholesale Trade(10:15-11:00) Fed purchase op(11:00) 3- & 6-mth & 1-yr BillAnnouncement(12:00) Q3 Flow of Funds(13:00) 30-yr(r) Bond Auction(16:30) Fed Balance Sheet &Money Supply

10

(08:30) Nov Imp Prices(08:30) Oct Trade Balance(09:55) Dec prelim Mich(14:00) Nov Budget

13

(10:15-11:00) Fed purchase op(11:00) 4-wk Bill

Announcement(11:30) 3- & 6-mth Bill Auction

14

(07:30) Nov NFIB Index(07:45/08:55) Store Sales

(08:30) Nov PPI 0.4%eCore PPI 0.3%e

(08:30) Nov Retail Sales0.3%eEx Autos 0.5%e

(10:00) Oct Inventories 1.0%e(11:30) 4-wk & 1-yr Bill Auction(14:15) FOMC statement

15

(07:00) Mortgage Apps(08:25) Atlanta Feds Lockhart

(08:30) Nov CPI 0.1%eCore CPI 0.0%e

(08:30) Dec NY Fed 10.0e(09:00) Oct TICS(09:15) Nov Indust Prod

0.0%e(10:00) Dec NAHB HMI 16e(10:15-11:00) Fed purchase op(11:30) SFP Auction

16

(08:30) Initial Claims 425Ke(08:30) Nov Housing Starts

555Ke(08:30) Q3 Current Account

-$125.5 bil(e)(10:00) Dec Phil Fed 19.0e(10:15-11:00) Fed purchase op(11:00) 3- & 6-mth BillAnnouncement(16:30) Fed Balance Sheet &Money Supply

17

(10:00) Nov Lead Ind 1.2%e(10:15-11:00) Fed purchase op

20

(10:15-11:00) Fed purchase op(11:00) 4-wk BillAnnouncement(11:30) 3- & 6-mth Bill Auction

(13:15-14:00) Fed purchase op

21

(07:45/08:55) Store Sales(10:15-11:00) Fed TIPS

purchase op(11:30) 4-wk Bill Auction

22

(07:00) Mortgage Apps(08:30) Q3 Real GDP (3rd est)

Q3 Corp. Profits (rev)(10:00) Nov Exist Home Sales

(10:00) Oct FHFA index(10:15-11:00) Fed purchase op(11:30) SFP Auction

23

(08:30) Initial Claims(08:30) Nov Income(08:30)Nov Durable Gds(09:55) Dec Mich

(10:00) Nov New Home Sales(11:00) 3- & 6-mth Bill & 2-yr,5-yr, & 7-yr NoteAnnouncement

Early close for US fixedincome markets

24

Christmas holiday (observed

Markets closed

27

(10:30) Dec Texas Mfg.(11:00) 4-wk BillAnnouncement(11:30) 3- & 6-mth Bill Auction(13:00) 2-yr Note Auction(16:30) Fed Balance Sheet &Money Supply

28

(07:45/08:55) Store Sales(09:00) Oct S&P/CS(10:00) Dec Conf. Board(10:00) Dec Richmond Fed(10:15-11:00) Fed purchase op(11:30) 4-wk Bill Auction(13:00) 5-yr Note Auction

29

(07:00) Mortgage Apps(10:15-11:00) Fed purchase op(11:30) SFP Auction(13:00) 7-yr Note Auction

30

(08:30) Initial Claims(09:45) Dec Chicago PMI(11:00) 3- & 6-mth BillAnnouncement(16:30) Fed Balance Sheet &Money Supply

31

(10:00) Dec Milwaukee PMI

MARKET LETTER DISCLAIMER (this is not a research report): This market letter was prepared for informational purposes only. It is based upon information generally available to the public from source

believed to be reliable, but MF Global Inc. makes no representation that it is accurate, complete, current, or that any returns indicated or projections made will be achieved. MF Global is not responsible fo

any errors or omissions in this market letter. Changes to assumptions may have a material impact on projections or returns contained or made herein. Furthermore, past performance is not necessaril

indicative of future results. Additional information regarding the information contained in this market letter is available from MF Global upon request. This market letter is neither an offer to sell nor solicitatio

of any offer to buy a security, nor does it take into consideration the financial status, investment objectives or financial experience of any particular recipient. Because MF Global provides such information a

part of a general information service and without regard to an investors particular circumstances, neither it nor its subsidiaries and/or affiliates shall be liable for any loss or damages arising directly or

indirectly out of any inaccuracy in the market letter or the use of such information. Copyright by MF Global Inc. (2010) 717 Fifth Avenue New York, NY 10022. MF Global Inc. is a registered futures

commission merchant, a member of the NFA, and a registered broker-dealer and member of the CBOE, FINRA and SIPC.

Documents

Macro for the Markets