Futures Market 98% Certain U.S. Prime Rate Will Remain At 3.25% After The June 23 FOMC Monetary Policy Meeting

Canada Raises Rates

Yesterday, Canada's central bank -- the Bank of Canada -- raised its key, short term interest rate by 25 basis points (0.25 percentage point.) Canada is the first G-7 nation to raise short-term rates since the banking crisis and subsequent Great Recession prompted central banks around the world to cut rates to record-low levels. The move by the Bank of Canada also ends the game of chicken that's been going on between the world's most powerful economies.

Included in the G-7: The United States, Japan, Germany, France, the United Kingdom, Italy and Canada.

Australia's central bank -- The Reserve Bank of Australia (RBA) -- began a cycle of rate hikes back on October of 2009.

US Manufacturing Continues to Expand

Also from yesterday: the Institute for Supply Management reported that its Purchasing Manager's Index (PMI) declined from 60.4 for April to 59.7% for May. A decline may seem negative but this is actually positive news. That's because for the PMI, any figure above 50% suggests that, in general, the American manufacturing sector is expanding, while any figure below 50% suggests contraction.

According to the PMI, American manufacturing has been in expansion mode since August of 2009. The PMI hit rock bottom during the height of the global banking crisis: it was 32.5% during December of 2008. Not quite a record low, but close. It was 30.3% during June of 1980.



Again from yesterday, the Commerce Department reported that construction spending rose by 2.7% last month. For a better perspective on how well the American construction sector is doing, however, best to have a glance at this chart:


Yep.

The above charts: courtesy Econoday.

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Of course, futures markets reacted to the above news. As of right now, the investors who trade in fed funds futures at the Chicago Board of Trade have odds at 98% (as implied by current pricing on contracts) that the FOMC will vote to leave the benchmark target range for the Federal Funds Rate at its current level at the June 23^RD, 2010 monetary policy meeting.


Summary of the Latest Prime Rate Forecast:

• Current odds that the Prime Rate will remain at the current 3.25% after the June 23^RD, 2010 FOMC monetary policy meeting is adjourned: 98% (very likely)
• NB: U.S. Prime Rate = (The Federal Funds Target Rate + 3)

The odds related to federal-funds futures contracts -- widely accepted as the best predictor of where the FOMC will take the benchmark Fed Funds Target Rate -- are constantly changing, so stay tuned for the latest odds.

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