Transcript Day 4 PPT
Financial Institutions and Markets FIN 304 Dr. Andrew L. H. Parkes Day 4 “How do financial markets work?” 卜安吉 Price Indices GDP deflator Uses Current Year Quantities – Bought today Consumer Price Index Uses Base Year Quantities – Bought in the Base Year Are they the same? Shanghai Dow Stock Index - WSJ Financial Institutions & Markets, Misc 2 What did you buy in 1967? OK then try 1982? These are the base years Were the goods the same? Notice even our example! Chain Weighted GDP Price index now Dow Jones World Stock Index Financial Institutions & Markets, Misc 3 What did today’s purchase cost in 1982? 1967? That’s the Paasche Index Today’s goods, base year prices An MP3 player in 1982? A digital Camera? So there are problems with Price indices … Financial Institutions & Markets, Misc 4 What happened yesterday in the U. S.? The Fed did what? Lowered the Fed Funds Rate – the interest rate that banks borrow reserves from each other (at the Fed) Lowered the Discount Rate Financial Institutions & Markets, Misc Graph source: WSJ 5 What happened yesterday in the U. S.? Usually both move together Fed lowered Discount Rate alone .5% once a few months ago Notice inflation – going in the opposite direction – this is NOT a good sign! Financial Institutions & Markets, Misc Source: NY Times 6 Economic Growth Slowing – AND … "Economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending," the Fed said. "Moreover, strains in financial markets have increased in recent weeks." (Fed Statement) Financial Institutions & Markets, Misc Sources: Fed and BLS 7 Inflation Risks remain – More? At the same time, "some inflation risks remain" due to elevated energy and commodity prices. (Fed Statement) Unlike last October, when the Fed said the risks of weaker growth and higher inflation were roughly balanced, implying no predisposition to cut rates again, Tuesday it elected not to assess the balance of risks. It said it "will continue to assess the effects of financial and other developments on economic prospects and will act as needed." Sources: Fed and BLS Financial Institutions & Markets, Misc 8 What have I Hammered ON in Class? 3 Goals of any Macroeconomy Full Employment Economic Growth Price Stability Sources: WSJ and BLS Financial Institutions & Markets, Misc 9 Anemic new jobs? New private-sector jobs increased an "anemic" 64,000 last month, he said. The average monthly increase for private-sector jobs has been 74,000 this year through November, compared with an average gain of 169,000 jobs a month last year -- a 56% decline. Sources: WSJ and BLS Financial Institutions & Markets, Misc 10 Notice “They” always help me! Whatever I Teach The Markets help The Fed helps Actually, it really happens every single day! 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. Sources: WSJ and BLS Financial Institutions & Markets, Misc 11 Recession – 38% Risk so … “Maybe” Macroeconomic Advisers, a widely-followed forecasting firm, said Tuesday it now expects the economy to contract slightly in the current quarter, the first time it would have done so since the recession of 2001. It expects growth to return to 1.8% in the first quarter of next year. ONE Quarter of Negative Growth THIS QUARTER – 4th! Sources: http://online.wsj.com/article/SB119739876442121375.html?mod=hps_us_whats_news Accessed on December 12, 2008 at 6:02 am Financial Institutions & Markets, Misc 12 Inflationary Expectations? Inflation expectations for the coming year rose to 3.5%, while long-term expectations increased as well. The share of people who say that now is a good time to buy a house because of low prices or a good deal hit 55%, a record high. Source: WSJ see slide 12 Financial Institutions & Markets, Misc 13 WAGE Inflation? The Labor Department said that average hourly earnings jumped a substantial $0.08, or 0.5%, to $17.63. But earnings are up just 3.8% from a year ago, suggesting that wage pressures are in check. That gives the Federal Reserve additional leeway to cut interest rates at next Tuesday's meeting. Source: Wall Street Journal Source: http://online.wsj.com/article/SB119703361873717116.html?mod=theafternoonreport Accessed on December 12, 2008 at 5:58 am Financial Institutions & Markets, Misc 14 TODAY’S MARKET REACTION? Investors reacted by sending stocks plunging and by bidding up Treasury bond prices. The Dow Industrials fell more than 200 points in a matter of minutes and kept sinking through the afternoon, closing off more than 294 points, or 2.1 percent, for the day, according to preliminary figures. Broader indexes like the Standard & Poor's 500 and the Nasdaq Composite fared even worse. Dow Jones Industrials (30) Source: New York Times Source: http://www.nytimes.com/2007/12/11/business/11cnd-fed.html?hp Accessed on December 12, 2008 at 5:54 am Financial Institutions & Markets, Misc 15 Problem Set #2 TUTORIAL - Cheers Let’s work on Problem Set #2 in class for a while at least. U.S. Males around New Years call this College BOWL TIME See ESPN BOWLING TIME!!! (College - American Football) Financial Institutions & Markets, Misc 16