GE Capital

GE Capital

GE Capital
Current Dynamics
U.S. Treasury yields and swap rates mostly fell in July as several weak U.S. economic data outcomes increased uncertainty over the economic outlook.  Last month, rates fell significantly as data also disappointed, inflation was subdued and financial markets weakened.  In May, Europe's fiscal developments led to significant risk aversion and increased market volatility.  Rates are sharply lower for 2010 so far, beginning with a noticeable decline in April, amid Europe's fiscal challenges and the Fed's pledge to keep rates exceptionally low.  
 
  • Libor:  On July 30, one and three-month U.S. Libor set at 0.30500% and 0.45375% respectively - 1 and 3m reached their highest levels of the year on May 26 and June 17.  According to the futures market, three-month Libor is expected to end 2010, 2011 and 2012 at 0.45%, 0.98% and 1.79% respectively.  One and three-month Libor are a respective 428 and 437 bps lower than their October 10 '08 crisis peak following government support to the financial system.    
     
  • Fed Policy:  On July 21, Fed Chairman Bernanke said he and his FOMC colleagues "expect continued moderate growth, a gradual decline in the unemployment rate, and subdued inflation over the next several years."  Bernanke said most FOMC participants "viewed uncertainty about the outlook for growth and unemployment as greater than normal."  The minutes of the June 22-23 FOMC meeting said meeting participants generally saw  "a continued, moderate recovery in economic activity. Participants noted that the labor market was improving gradually, household spending was increasing, and business spending on equipment and software had risen significantly."
     
  • Economic Indicators:  Recent U.S. data releases showed that in July, consumer confidence fell for a 2nd month amid increased economic and market uncertainty.  In June, new home sales increased nearly 24%, however, the pace was the 2nd slowest on record (data back to 1963), existing home sales decreased 5.1%, consumer prices fell for a 3rd straight month, capacity utilization matched its highest level in 19 months, retail sales fell for a 2nd straight month, there was a 6th straight month of private sector job creation although the latest figures were disappointing, the unemployment rate fell to 9.5% and economic activity in the manufacturing sector (ISM) expanded for an 11th consecutive month, however, at the slowest pace of the year.  In May, business inventories increased just 0.1% - the smallest gain this year.  In Q2, real GDP increased at a slower 2.4% annual rate and consumer spending eased overall.  
 
Risk appetite: A significant increase in risk aversion during May and late June contributed to the recent decline in U.S. Treasury yields.  June's 5.4% decline in the S&P 500 index follows May's 8.2% drop and is consistent with a downgraded near-term U.S. economic outlook.  

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China's fx policy: Although U.S. inflation has slowed this year, the potential for a stronger Chinese yuan is a consideration for sending some of China's cost pressures into the global price structure creating greater medium-term U.S. inflation risk.  

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