Economic Summary 11th Jan 2008

Strong signals from Fed Chairman Bernanke that the FOMC will be cutting rates
further propelled equities into positive territory while simultaneously
boosting short-term Treasuries. Longer-term Treasuries and the dollar sold off
on the chairman's remarks.

Initial claims for unemployment insurance for the week ended January 5 fell by
a sharper-than-expected 15k to 322k. Continuing claims, while still a concern,
did turn lower. Continuing claims fell 52k in the week ended December 29 after
a combined 161k jump higher in the previous four weeks. The continuing claims
data still bear watching as their four-week average of 2.7mn is the highest
seen since mid November 2005.

Commercial paper outstanding for the week ended January 9 rose by $14.5bn, its
largest gain since late July. Asset-backed CP outstanding rose $4.8bn,
building upon a $26.3bn jump the previous week. These were the first gains in
ABCP since the subprime mortgage-related credit crisis hit full force in early
August.

Annual revisions to Philadelphia Fed index seasonal factors were released this
morning. With the new seasonals, the December index was revised up to -1.6
from -5.7. November was revised down to +7.5 from +8.2. January's Philadelphia
Fed index is scheduled for release next Thursday, January 17.

Little attention was paid to the stronger-than-expected 0.6% gain in November
wholesale inventories. The consensus forecast was +0.4%. In general, inventory
accumulation probably provided less of a boost to GDP growth in Q4 than it did
in Q3, and we forecast it will subtract from growth throughout the first half
of 2008.

In a speech today, Fed Chairman Bernanke all but announced that more easing is
on the way. The chairman, well aware that markets had already priced in
several fed funds rate cuts over the next few months, used strong language in
his prepared text that validated the markets' expectations. Moreover, he
suggested that the additional policy moves could be aggressive: "...we stand
ready to take substantive additional action as needed to support growth and to
provide adequate insurance against downside risks." Before the speech, we were
forecasting another 100bp in rate cuts by mid-year, bringing the funds target
to 3.25%. The chairman's speech raised the likelihood that the bulk of the
easing moves will be front-loaded into Q1.

Weekly reserve data showed that daily average borrowing from the discount
window in the week ended January 9 fell to $1.5bn from $5.8bn the previous
week. Borrowing on January 9 alone was $1.0bn, split between the New York and
San Francisco districts.

Economic Outlook

The December Import Price Index will be released at 8:30 on Friday (Forecast
-0.4%, Consensus +0.1%). A drop in petroleum prices in December probably
tipped the entire import price index into negative territory that month. We
estimate prices of imported goods fell 0.4% in December after their 2.7%
petroleum-related surge in November. The imported petroleum index increased by
9.8% in November, and we estimate it fell back by 2.0% in December. Excluding
all imported fuel prices, including those for natural gas, we estimate import
prices rose by 0.1% after a 0.5% jump in November.