mfm jun 17 2011

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MACRO FOR MARKETS

mfglobal.com

No Growth Rebound Yet; Core Inflation UpWe continue to expect growth to show renewed upward momentum soon, helped by a fading or

reversal of some of the factors that have contributed to weakness recently. That said, a

turnaround is not evident yet. Against that backdrop, we expect a clear on hold signal from Fed

officials in the statement released after the upcoming FOMC meeting as well as the chairmans

post-meeting press briefing. The disappointing data recently will likely be noted, but we doubt

officials are ready to extrapolate much of the weakness yet. In the other direction, underlying

(i.e., core) inflation has accelerated recently, even if it is still subdued. Indeed, following the

latest CPI report, we raised slightly our 2011 forecast for core and total inflation. We now expect

the core CPI to rise 1.8% this year (Q4/Q4), instead of 1.6%.Taylor Rule Suggests Fed Tightening if Officials Unemployment and Inflation

Projections Stay on TrackWeaker than expected growth, combined with Eurozone debt turmoil and, perhaps, increased

expectations for some fiscal tightening have led to significantly reduced market expectations for

Fed tightening. Fed funds futures contracts now appear to be pricing in only about a 0.5% funds

rate at the end of 2012. We realize Fed officials do not mechanically follow a Taylor Rule in

setting monetary policy, and expectations for growth are being pared a little, but, based on the

original Taylor Rule and adjusting for stimulus from balance sheet expansion, we calculate that

the last set of Fed projections was consistent with about a 3% funds rate at the end of 2012.

Preview: Home Sales Down, Durables and GDP UpAlong with the Fed meeting and the usual weekly data, highlights will include new and existing

home sales (we expect declines in both series), home prices (we forecast stabilization), durablegoods orders (up solidly), and revised Q1 GDP growth (we expect a 0.5-point upward revision).

Based on the original Taylor Rule, and adjusting for stimulus from balance sheet expansion,

we estimate the last set of central tendency projections from Fed officials would prescribe

about a 3% funds rate at the end of 2012, and 3 3/4% at the end of 2013.

*, **, *** See chart on page 6 for notes. Shaded bars represent periods of recession.Source: Federal Reserve, Bureau of Economic Analysis, Bureau of Labor Statistics, Congressional Budget Office (CBO),and MF Global

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 | No Growth Rebound Yet;Core Inflation Up

Pg. 6 | Taylor Rule Suggests FedTightening if OfficialsUnemployment and InflationProjections Stay on Track

Pg. 8 | Forecast Summary

Pg. 9 | Data Preview

Pg. 13 | Calendar

JUNE 17, 2011 INSTITUTIONAL USE ONLY MF Global Weekly Report

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6/17/2011 |MACRO FOR MARKETS

NO GROWTH REBOUND YET; CORE INFLATION UP

We continue to expect growth to show renewed upward

momentum in the next few months, helped by a fading or reversal

of some of the factors that have contributed to greater-than-

expected weakness recentlyincluding the Q1 spike in oil prices,

Japan-related supply-chain disruptions, and extreme weather.That said, a turnaround is not evident yet. While this past weeks

jobless claims reading was encouraging (with a drop to 414,000

from 430,000), regional manufacturing surveys were weak (with

the headline New York and Philadelphia Fed indexes dropping

below zero). The ongoing Eurozone debt crisis is not helping

either, potentially undermining business and consumer

confidence through its impact on the equity market.

Against that backdrop, we expect a clear on hold signal from

Fed officials in the statement released after the upcoming FOMC

meeting as well as the chairmans post-meeting press briefing

with no imminent change in either the funds rate or the size of the

balance sheet once the $600 billion asset purchase program is

completed this month.

The disappointing data recently will likely be noted in the

statement, but we doubt officials are ready to extrapolate much of

the weakness yet. We expect only a modest lowering of officials

growth projections. In the other direction, officials will likely also

have to acknowledge that underlying (i.e., core) inflation has

accelerated recently, even if it is still subdued. Indeed, following

the latest CPI report we have raised slightly our forecast for core

and total inflation this year (details below).

No More Fed EasingThe weakening in the growth data has inevitably led to

speculation about another round of Fed asset purchases, or

QE3 in the terminology of most people outside of the Fed.

If our forecast for the economy is right, QE3 will clearly not

happen; instead, we expect the Fed to just stay on hold in coming

months (including a freeze on the size of the balance sheet) and

then start unwinding some of its accommodation in 2012.

But what if growth continues to disappoint? We believe QE3 is

highly unlikely. We are not saying there is no chance; ultimately,

Fed officials will do whatever it takes. However, in our view, the

data would need to show much more decisive weakening, on a

sustained basis, and not just for growth; the inflation and inflationexpectations measures will also be very important.

As of now at least, the unemployment rate is lower, the latest

trend in core inflation is higher, and inflation expectations

measures, particularly the TIPS five-year, five-year forward

measure, are higher than they were when officials started to

signal round two of asset purchases a year ago. Plus, the

criticism the Fed received last time would likely make officials

Some, but not all, of the recent spike in claims has been

reversed. Claims fell to 414,000 from 430,000 in the latest report

Source: Department of Labor and MF Global

The current activity indexes in both the New York and the

Philadelphia Fed manufacturing surveys fell below zero in June.

While very weak, the data can change direction quickly. Both

indexes fell below zero in 2010, albeit not at the same time.

Note: Shaded bars represent periods of recession.Source: Federal Reserve Banks of New York and Philadelphia

Business confidence fell only modestly in Q2 according to the

latest Business Roundtable survey.

Source: Business Roundtable and The University of Michigan

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less quick to respond this time. In short, never say never, but QE3

is highly, highly unlikely unless the recovery is much weaker than

just disappointing; it has to be faltering, and inflation and inflation

expectations measures would need to start moving down again.

That has certainly not happened yet.

Clear Pickup in Core Inflation

The 0.3% m/m rise in the core CPI in May boosted the 2011-to-

date increase (May vs. December) to 2.4% at an annual rate from

2.1% through April. The core CPI rose just 0.8% in 2010

(December to December). Moreover, the pickup has been fairly

broad-based (see table).

The Feds preferred core PCE price index measure likely rose

less than the core CPI in Maywe estimate a 0.2% m/m rise

but it also shows a clear pickup this year. Our 0.2% m/m estimate

for May implies a 2011-to-date pace of 2.0% at an annual rate, up

from a 0.8% gain in 2010 (December to December).

Such short-term calculations can be volatile, and we do not

believe the trend in core inflation is quite back to the roughly 2%

pace considered ideal by most Fed officials. On a y/y basis, we

estimate the core PCE measure was up 1.1% y/y in May,

following 1.0% in April. The core CPI was up 1.5% y/y in May.

Still, the turnaround since last fall, when Fed officials were

increasingly worried about deflation risks, has been striking.

We now expect the y/y pace in the core CPI to be up to 1.8% in

Q4 of 2011, instead of 1.6%, with the pace in the core PCE index

up to 1.5%, instead of 1.3%. Even those new estimates assume a

significant slowing relative to the first five months of the year. Forthe total CPI, we now forecast 2.8% y/y in Q4 of this year, instead

of 2.4%. (The total CPI was 3.6% y/y in May.)

The recent weakening in commodity prices will likely contribute to

some slowing in core consumer prices in coming months, to the

extent the recent acceleration in core prices may have reflected

some pass-through effects. Both new and used vehicles prices

are also likely to slow, with the sharp pickup recently probably

exaggerated by inventory shortages related to Japan supply-

chain effects. Conversely, the trend in import prices suggests

further acceleration in the apparel component (see top right chart

on following page), while rents are likely to continue accelerating

if the labor market continues to improve, as we expect. The rateof growth in employment is a key driver of rental demand, and

payrolls show a clear pickup this year, even with the weaker-than-

expected May data. (Gains have averaged 157,000 per month, up

from 78,000 in 2010.)

The overall CPI was up 3.6% y/y in May, a pickup from 1.5% y/y

in December. It has risen at a 5.1% annual rate so far this year

(May vs. December). The recent decline in oil prices is likely to

lead to a reversal of some of that pickup in coming months.

The core CPI has also accelerated this year, to 1.5% y/y in May

from 0.8% y/y in December.

Source: Bureau of Labor Statistics

The core CPI shows a 2.4% annual rate so far this year (May vs.

December), up from 0.8% in 2010 (December to December).The

pickup has been fairly broad-based, although two categories have

been especially important contributors: shelter (mainly rents) and

vehicles.

% ch, annual rate,unless noted

2010* 2011THRUMAY**

ACCEL/

DECEL.(2011 vs.2010,

pct pcts)

CONTRIBUT

TOACCEL/DECE

pct pts.)

CORE CPI 0.8 2.4 1.6 1.

SHELTER (41.6%) 0.4 1.3 0.9 0.

RESIDL RENT (7.7%) 0.8 1.5 0.7 0.

OER (32.4%) 0.3 1.1 0.9 0.

LODGING (1.0%) 2.5 6.3 3.8 0.

FURNISH/OPS (5.9%) -2.5 1.1 3.6 0.

APPAREL (4.8%) -1.1 2.3 3.4 0.

NEW VEHICLES (5.6%) -0.2 8.4 8.6 0.

USED VEHICLES (2.6%) 3.7 7.2 3.5 0.

AIRFARES (1.0%) 5.8 13.1 7.3 0.

MEDICAL CARE (8.4%) 3.3 3.2 -0.1 0.

RECREATION (8.3%) -0.8 1.7 2.4 0.

EDUC, COMMUN (8.3%) 1.3 1.6 0.3 0.

OTHER (4.5%) 1.9 0.2 -1.7 -0.

*December 2010 vs. December 2009 (nsa)**May 2011 vs. December 2010 (sa)Source: Bureau of Labor Statistics and MF Global

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Claims Still Show Net Risebut Not Cumulating Weakness

As noted, the latest jobless claims data were encouraging, with

the weekly reading down to 414,000 from 430,000. At 425,000,

the four-week average is still up about 30,000 from the trend in

March, although the four-week average was as high as 440,000 a

month ago (see top chart on page 2). In short, the data are not

showing cumulating weakness in the overall economy, which

cautions against extrapolating the sharp dropoff in the current

activity indexes in the New York and Philadelphia Fed

manufacturing surveys. Those regional indexes can change

direction quickly, and both turned negative briefly in 2010 (albeit

not in the same monthsee middle chart on page 2).

Labor cost data do not suggest a continuation of the recent sharp

uptrend in core inflation, although gains have stopped slowing

recently, even with unemployment at a high level. The pattern is

likely due in part at least to the upward pull from well-anchored

inflation expectations. Another factor could be nominal rigidities,with widespread aversion to outright cuts.

*Through May. **Series starts in 2006. Source: Bureau of Labor Statistics

Despite the surge in apparel import prices, the pickup in overall

consumer goods import prices has been fairly modest thus far.

Source: Federal Reserve Board and Bureau of Labor Statistics

The modest drop in the Business Roundtables CEO confidence

index in Q2 was also encouraging: after rising from 101.0 in Q4 to

113.0 in Q1, the index fell to 109.9 in Q2 (see bottom chart on

page 2). Indeed, the Q2 reading was the second highest on

record (second only to Q1), with history starting in 2002. Businesconfidence is likely to be a more important determinant of the

trend in growth in coming months than consumer confidence, with

consumer confidence ultimately driven by the extent to which

hiring picks up.

A pickup in apparel prices in the CPI looks consistent with the

pattern in import prices. Indeed, apparel import prices are

signaling further acceleration.


Weakening in TV import prices has offset part of the impact of the

surge in apparel import prices on overall consumer goods import

prices, although the data have not shown much correlation with

TV prices in the CPI.

Source:Bureau of Labor Statistics

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FOMC Statement Likely to Once Again Signal No Rush to Tighten

The April 27 FOMC statement (below) was very similar to the March 15 version, consistent with no new message on policy. While the

easing cycle was expected to end at mid-year, when the $600 billion purchase program is completed, officials still appeared in no rush

to tighten. Moreover, in his post-meeting press briefing the chairman clearly signaled the intention to continue reinvesting maturing

securities when the $600 billion program is completed at mid-yearat least initially. Such forward guidance on reinvesting was not

included in the FOMC statement. Mr. Bernanke made clear that a likely small first step in the tightening process would be when the Fe

stops reinvesting maturing securities, but even that step would depend on the outlook.

FOMC StatementsApril 27, 2011 versus March 15, 2011 (New wording is highlighted in bold)

Information received since the Federal Open Market Committee met in March January indicates suggests that the economicrecovery is proceeding at a moderate pace on a firmer footing, and overall conditions in the labor market are appear to beimproving gradually. Household spending and business investment in equipment and software continue to expand. However,investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Commodity prices haverisen significantly since last the summer, and concerns about global supplies of crude oil have contributed to a further increasesharp run-up in oil prices since the Committee met in March in recent weeks. Inflation has picked up in recent months, but

Nonetheless, longer-term inflation expectations have remained stable, and measures of underlying inflation are still have beensubdued.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, Ttheunemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels thatthe Committee judges to be consistent, over the longer run, with its dual mandate. The recent Iincreases in the prices of energyand other commodities have pushed up inflation in recent months are currently putting upward pressure on inflation. TheCommittee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflationexpectations. The Committee continues to anticipate a gradual return to higher levels of resource utilization in a context of pricestability.

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with itsmandate, the Committee decided today to continue expanding its holdings of securities as announced in November. In

particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and willcomplete intends to purchases of $600 billion of longer-term Treasury securities by the end of the current second quarter of2011. The Committee will regularly review the size and composition pace of its securities holdings purchases and the overallsize of the asset-purchase program in light of incoming information and is prepared to will adjust those holdings the programas needed to best foster 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 thateconomic 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 will continue to monitor the economic outlook and financial developments and will employ its policy tools asnecessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A.Duke; Charles L. Evans; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo;and Janet L. Yellen.

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TAYLOR RULE SUGGESTS FED TIGHTENING IF OFFICIALS

UNEMPLOYMENT AND INFLATION PROJECTIONS STAY ON

TRACK

Weaker than expected growth data, combined with Eurozone

debt turmoil and, perhaps, increased expectations for some fiscal

tightening have led to significantly reduced expectations in

financial markets for Fed tightening. Fed funds futures contracts

appear to be pricing in only about a 0.5% funds rate at the end of

2012, down from around 1.5% two months ago. And, certainly, we

would not expect tightening if the growth data continue to

disappoint and the unemployment rate remains over 9% on a

sustained basis. However, we expect the growth data to improve

enough to keep the unemployment rate trending lower. (The 9.1%

level in May was down from 9.6% in Q4, even with increases in

April and May.) Meanwhile, as discussed on page 3, the

underlying trend in inflation has moved up over the past year.

While tightening is clearly not imminent, it is almost inevitable

eventually if the unemployment rate continues to decline and the

trend in inflation is edging up. The only questions are when? and

how fast?

We realize Fed officials do not mechanically follow a Taylor Rule

in setting monetary policy. Indeed, there is no single Taylor Rule,

with many analysts empirically deriving Taylor Rules based on

how the Fed has acted in the past. However, the Fed chairman is

on record defending policy based on the original Taylor Rule, and,

based on that version, and adjusting for stimulus from balance

sheet expansion (an additional complication), we estimate the last

set of central tendency projections from Fed officials would

prescribe about a 3% funds rate at the end of 2012. That 3%calculation reflects a 1% figure without adjusting for the stimulus

from balance sheet expansion and the equivalent of two points of

stimulus from the enlarged balance sheet (allowing for a $300

billion decline in total Fed assets next year). While we are not

suggesting that the results be taken literally, and the estimates

will likely change a little after Fed officials update their central

tendency projections at the upcoming meeting, the calculations

support our view that financial markets are pricing in too little

tightening in 2012.

Here are the details behind our calculations:

The original Taylor Rule, based on the GDP output gap (the %deviation between actual and potential GDP) and inflation,

calculates the appropriate level of the federal funds (FF) rate as

follows:

FF rate (%) = 2 + Inflation + 0.5 (Inflation 2) 0.5 Output gap

Based on the original Taylor Rule, and adjusting for stimulus from

balance sheet expansion, we estimate the latest set of central

tendency projections from Fed officials would prescribe about a

3% funds rate at the end of 2012 (see text for details). We are

not suggesting that the results be taken literally, and the

estimates will likely change a little after Fed officials update their

central tendency projections at the upcoming meeting, but the

calculations provide reason to believe short-term fixed income

markets will need to adjust significantly if the recent weakening in

the growth data is not sustained. Fed funds futures contracts now

appear to be pricing in only about a 0.5% funds rate at the end of

2012.

* Using latest set of Fed officials' central tendency projections (CTPs)**Modified original Taylor Rule, using unemployment rate (UE) gap (differencebetween unemployment rate and estimated full-employment unemployment rate)instead of output gap and assuming a 0.5-point change in the unemployment rate

for every 1.0 point change in the output gap. Specifically: Fed funds = 2.0 + CorePCE inflation + 0.5 x (Core PCE inflation - 2.0) - 0.5 x UE gap. For estimated full-employment unemployment rate we use Congressional Budget Office historicalestimates through 2010 and Fed officials' latest "longer-run" projection for 2011-13.*** Modified original Taylor Rule using unemployment rate gap (** above), adjustedfor stimulus from balance sheet expansion, assuming every $200 billi on of balancesheet expansion is equivalent to an additional 25 bps of easing through the fundsrate. Projections assume a $2.875 trillion balance sheet at end-2011, $2.575 trillionat end-2012, and $2.275 trillion at end-2013..Source: Federal Reserve, Bureau of Economic Analysis, Bureau of Labor Statistics,Congressional Budget Office (CBO), and MF Global

Here are Fed officials latest central tendency projections. Theprojected unemployment rate will likely be raised slightly at theupcoming FOMC meeting, but not enough to change the

estimates in the chart above significantly.%Q4/Q4, sa, unless noted 2011 2012 2013

LONGERRUN

REAL GDP 3.1-3.3 3.5-4.2 3.5-4.3 2.5-2.8

UNEMPL. RATE (Q4, %, sa) 8.4-8.7 7.6-7.9 6.8-7.2 5.2-5.6

PCE INFLATION 2.1-2.8 1.2-2.0 1.4-2.0 1.7-2.0

CORE PCE INFLATION 1.3-1.6 1.3-1.8 1.4-2.0

Source: Federal Reserve

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A modified original Taylor Rule, using the more observable

unemployment rate rather than the output gapand more

specifically, the unemployment gap, which is the difference

between the unemployment rate and the estimated full-

employment unemployment rateand allowing for a 0.5-point

change in the unemployment rate for every one-point change in

the output gap (roughly the Okuns Law relationship based on

recent experience), has the funds rate (%) =

2 + Inflation + 0.5 (Inflation 2) 1.0 Unemployment gap

Based on the mid-point of central tendency projections, Fed

officials are currently projecting a 1.55% trend in inflation at the

end of 2012 (using core PCE prices) and a 7.75% level for the

unemployment rate. In turn, a 7.75% unemployment rate implies

an unemployment gap of 2.35% (using the mid-point of officials

longer-term projection for the unemployment rate as the

estimated full-employment unemployment rate).

Incorporating those figures in the equation above yields a 1.0%

level for the prescribed funds rate:

2 + 1.55 + 0.5 (1.55 2) 1.0 2.35 = 1.0%

The original Taylor Rule only allowed for conventional policy

action, with stimulus provided only through the funds rate.

Meanwhile, Fed officials have estimated that every $200 billion of

balance sheet expansion is equivalent to around 25 bps of

conventional easing. A $2.0 trillion expansion of the balance

sheet, to an estimated $2.9 trillion at the end of this month from

$0.9 trillion before the crisis, is thus worth an extra 250 bps.

In the chart on page 6 we are allowing for about a $300 billion

decline in the size of the Fed balance sheet in 2012, reducing the

stimulus from that source to the equivalent of around 210 bps. As

a result, the prescribed funds rate after adjusting for the

expanded balance sheet would be around 3% at the end of 2012.

Note that the co-efficient on the unemployment gap in the

equation is 1.0, so even a 0.5 point boost to the estimated

unemployment rate would only lower the prescribed funds rate by

0.5 percentage point.

Again, we are not suggesting that these estimates be takenliterally (we are currently forecasting a 1.5% funds rate at the end

of 2012), but they provide reason to believe fixed income markets

will need to adjust significantly if the unemployment rate

continues to trend down.

At 9.1%, the May reading for the unemployment rate was up

from 8.8% in March but down from 9.6% in Q4.


We estimate the core PCE price index was up 1.1% y/y in May,

still below the 1.7-2.0% pace considered ideal by Fed officials

(based on the longer-run figure in the last set of central

tendency projections), but up from 0.8% y/y at the end of 2011.

That measure has risen at an estimated 2.0% annual rate so far

this year (May vs. December).

Inflation expectations indicators have shown little net change from

average levels in recent years; last years drop in breakeven

inflation rates priced into Treasury Inflation-Protected Securities

(TIPS) has been reversed. Continued resilience in inflation

expectations is likely helping offset the downward pressure on

inflation from the high unemployment rate.

*Including estimated 0.2% m/m rise in MaySource: Bureau of Economic Analysis, Bureau of Labor Statistics, Federal ReserveBoard, and MF Global

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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 2.6 3.1 1.8 3.5 4.0 4.0 2.9 2.9 3.9 2.8 3.3

FINAL SALES 1.1 0.9 0.9 6.7 0.6 3.3 4.1 4.4 1.4 3.0 3.9 2.4 3.1

DOMESTIC FINAL SALES 1.3 4.3 2.6 3.2 0.7 2.0 3.8 4.1 1.9 2.5 3.4 2.9 2.6

NET EXPORTS (pct pt contr) -0.3 -3.5 -1.7 3.3 -0.1 1.2 0.2 0.2 -0.5 0.4 0.3 -0.6 0.4

INVENTORIES (pct pt contr) 2.6 0.8 1.6 -3.4 1.2 0.2 -0.1 -0.4 1.4 -0.1 0.0 -0.3 0.2

CONSUMPTION 1.9 2.2 2.4 4.0 2.2 1.5 3.5 3.5 1.7 2.7 3.3 2.6 2.7

BUSINESS FIXED INVESTMENT 7.8 17.2 10.0 7.7 3.4 9.0 9.2 11.5 5.7 8.1 8.2 10.6 8.2

STRUCTURES -17.8 -0.5 -3.6 7.7 -16.8 12.0 4.0 4.0 -13.7 -0.8 4.9 -4.0 0.2

EQUIPMENT & SOFTWARE 20.5 24.8 15.4 7.7 11.6 8.0 11.0 14.0 15.3 11.4 9.3 16.9 11.1

RESIDENTIAL INVESTMENT -12.3 25.6 -27.3 3.3 -3.3 1.0 12.0 12.0 -3.0 -0.5 13.6 -4.6 5.6

EXPORTS 11.4 9.1 6.7 8.6 9.2 10.0 11.0 11.0 11.7 9.3 11.3 8.9 10.3

IMPORTS 11.2 33.5 16.8 -12.6 7.6 1.0 7.5 7.5 12.6 4.6 7.1 10.9 5.8

GOVERNMENT -1.6 3.9 3.9 -1.7 -5.1 0.5 1.2 1.5 1.0 -0.6 0.5 1.1 -0.5

INVENTORIES (ch $bil ar) 44 69 121 16 52 59 56 43 63 53 55 16 43

PI 1.3 -0.5 1.4 2.6 5.2 3.9 1.1 1.1 1.6 2.9 1.9 1.3 2.8

CORE CPI 0.0 0.8 1.1 0.6 1.7 2.4 1.7 1.5 1.0 1.5 1.9 0.7 1.8

ORE PCE PRICES 1.2 1.0 0.5 0.4 1.4 1.9 1.4 1.2 1.3 1.2 1.8 0.8 1.5

NEMPLOYMENT (%, level) 9.7 9.6 9.6 9.6 8.9 9.0 8.8 8.6 9.6 8.8 8.1 9.6 8.6

EDERAL BUDGET BAl($bil, fy) -1294 -1350 -1050

% OF GDP -9.2 -8.9 -6.5

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 0.8 0.5 1.1 1.5 0.7 1.0 2.2 0.6 1.5

10-YEAR TREASURY 3.8 3.0 2.5 3.3 3.5 3.1 3.6 3.9 3.2 3.5 4.1 3.3 3.9

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

FORECAST SUMMARY

We believe much of the weakness in real GDP in Q1 reflected

volatility and weather effects rather than a weaker trend, with

payback likely in Q2; we forecast a 3.5% annual rate for Q2

following 1.8% in Q1. The net result is a 2.7% first-half average,

weaker than data were suggesting as the year began, with much

of the setback likely due to the Q1 spike in energy costs and

supply chain effects stemming from the crisis in Japan. We still

forecast a 4.0% pace in the second half of this year, althoughrecent data clearly suggest downside risk. Real GDP growth

averaged 2.9% at an annual rate in the first year and a half of the

recovery (through 10Q4).

Prior to the latest data, employment growth appeared to be

picking up significantly in 2011. We expect momentum to pick up

again soon, consistent with at least a gradual downtrend in the

unemployment rate. Although the unemployment rate rose in April

and May, the 9.1% level in May was down from 9.6%, on

average, in 10Q4.

While we believe ample slack will keep inflation fairly tame, even

core inflation now appears to be edging up again. We expect the

pace in the core PCE price index to move up from 0.8% in 2010

to 1.5% in 2011 and 1.7% in 2012 (Q4/Q4). Overall inflation will

likely be higher than core inflation this year, due to a net rise in

food and energy prices. A still-high (but declining) unemploymentrate 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 Fed officials to complete the $600 billion

asset purchase program and then hold the balance sheet

constant in 11H2. We expect Treasury yields will rise, with 10-

year yields up to 3.9% at the end of 2011 and 4.2% at the end of

2012.

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DATA PREVIEW

WEEKLY STORE SALES (TUE, JUN 21, 07:45/08:55)

MAY 28 JUN 4 JUN 11 JUN 18

WEEKLY ICSC, %w/w, sa 0.4 0.4 -0.8

WEEKLY ICSC, %y/y 2.8 2.5 2.4

REDBOOK, %y/y 3.6 4.2 3.2

APR MAYJUN

THRU 11JUN

THRU 18

WEEKLY ICSC, %m/m, sa 2.5 -2.3 -0.7

REDBOOK, %m/m, sa 1.3 -2.7 0.8

MONTHLY ICSC, %m/m, sa 0.3 -2.6

WEEKLY ICSC, %y/y 3.0 3.0 2.5

REDBOOK, %y/y 5.1 3.9 3.7

MONTHLY ICSC, %y/y 8.5 5.4

Note: monthly data are based on the retail industry's fiscal calendar, the fiscal monthof June ends on July 2.Source: International Council of Shopping Centers, Instinet, and MF Global

The weekly store sales indexes have been mixed so far in June,

providing no clear signal. (The Redbook index is up at a 0.8%

m/m pace, while the ICSC index is down at a 0.7% m/m pace.)

The indexes were weaker than the comparable retail sales data in

May.

EXISTING HOME SALES (THU, JUNE 21, 10:00)MAY EST

FEB MAR APR CONS MF

TOTAL (000s, saar) 4920 5090 5050 4800 4900

%m/m -8.9 3.5 -0.8 -5.0 -3.0

%y/y -2.0 -6.4 -12.9 -13.7

MONTHS' SUPPLY 8.5 8.3 9.2

MEDIAN PRICE (%y/y) -5.2 -5.8 -5.0

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

Existing home sales probably fell again in May, even if the plunge

in the pending home sales index in April (-11.6% m/m) overstated

weakness.

Despite the likely decline, the trend in sales continues to look

close to flat (at a low level). Our 4.900 million-unit-pace forecast

for May is virtually identical to the 4.908 million total for 2010.

The level is still down sharply from the annual peak of 7.076

million in 2005. Moreover, post-2007 data are likely to be revised

down later this year to account for apparent double-counting. The

expected revision will likely not affect the most recent trajectory

significantlyjust the levels.

Existing home sales have been exceptionally volatile during the

last two years, likely reflecting tax credit and weather effects. The

net result has been a near-flat trend: sales totaled 4.9 million in

2008, 5.1 million in 2009, and 4.9 million in 2010.

Source: National Association of Realtors

MORTGAGE APPLICATIONS (WED, JUN 22, 07:00)

MBA indexesPURCHASE

INDEXREFI INDEX 30-YEAR

MORTGAGERATE %WKLY

4-WKAVG

WKLY 4-WK AVG

MAY 20 191.4 189.4 2591.7 2377.7 4.69

MAY 27 191.4 191.6 2442.9 2468.0 4.58

JUN 3 182.9 188.6 2475.7 2519.6 4.54

JUN 10 191.1 189.2 2883.7 2598.5 4.51

JUN 17

Source: Mortgage Bankers' Association

The purchase index continues to show little net change,

consistent with a near-flat trend in home sales. At 189.2, the

latest four-week average is virtually unchanged from 191.9, on

average, in Q4, although it is up a little from 186.4 in Q1.

FHFA HOUSE PRICE INDEX (WED, JUN 22, 10:00)APR EST

JAN FEB MAR CONS MF

PURCHASE-ONLY INDEX

%m/m, sa -1.2 -1.5 -0.3 -0.3 0.0

%m/m, nsa -1.5 -0.9 0.0 0.6

%y/y -4.9 -5.5 -5.9 -5.8

Source: Federal Housing Finance Agency, Bloomberg, and MF Global

Home price indexes may be stabilizing after a several months of

declines. That pattern has been suggested by already released

CoreLogic and Radar index data for March.

3700

4430

5160

5890

6620

7350

70

82

94

106

118

130

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

PHSI (l) Existing home sales (r)

index, sa 000s, saar

Apr

8/6/2019 MfM Jun 17 2011

10/13



Home prices have weakened again recently, although net

changes since mid-2009 have generally been modest. Data

already available for April suggest weakening may be ending.

*FHFA and S&P/Case Shiller through March; Radar Logic through mid-April;CoreLogic through April.Source: CoreLogic, Federal Housing Finance Agency, Standard & Poor's, Fiserve,MacroMarkets LLC, and Radar Logic

The weakening in home prices recently has been concentrated

in distressed-sale homes.

Source: CoreLogic

FOMC STATEMENT AND PRESS BRIEFING (WED, JUNE 22, 12:30 &14:15)Fed officials central tendencyprojections; %Q4/Q4, sa,unless noted 2010 2011 2012 2013

LONGR

REAL GDP

NOV 10 2.4-2.5 3.0-3.6 3.6-4.5 3.5-4.6 2.5-2.

JAN 11 NA 3.4-3.9 3.5-4.4 3.7-4.6 2.5-2.

APR 11 NA 3.1-3.3 3.5-4.2 3.5-4.3 2.5-2.

UNEMPL. RATE (Q4 level, %, sa)

NOV 10 9.5-9.7 8.9-9.1 7.7-8.2 6.9-7.4 5.0-6.

JAN 11 NA 8.8-9.0 7.6-8.1 6.8-7.2 5.0-6.

APR 11 NA 8.4-8.7 7.6-7.9 6.8-7.2 5.2-5.

PCE INFLATION

NOV 10 1.2-1.4 1.1-1.7 1.1-1.8 1.2-2.0 1.6-2.

JAN 11 NA 1.3-1.7 1.0-1.9 1.2-2.0 1.6-2.

APR 11 NA 2.1-2.8 1.2-2.0 1.4-2.0 1.7-2.

CORE PCE INFLATION

NOV 10 1.0-1.1 0.9-1.6 1.0-1.6 1.1-2.0

JAN 11 NA 1.0-1.3 1.0-1.5 1.2-2.0

APR 11 NA 1.3-1.6 1.3-1.8 1.4-2.0

MEMO: MF FORECASTS

REAL GDP 2.8* 3.3 3.9

UNEMP. RATE (Q4 level, %,

sa)9.6* 8.6 7.8

CORE PCE INFLATION 0.8* 1.5 1.7

*Already reported. Source: Federal Reserve and MF Global

Updated economic projections from Fed officials are expected to

be released at 2:15 pm on June 22, coinciding with the start of th

chairmans post-meeting press briefing. The FOMC statement is

scheduled to be released around 12:30 pm. (See page 2 for

more.)

The updated projections will likely include a lowering of expected

real GDP growth in 2011 (from 3.1-3.3% in April, based on the

central tendency projections), along with a slight raising of the

projected unemployment rate in 11Q4 (from 8.4-8.7%). The 2012

growth projections could also be lowered slightly, consistent with

officials viewing the weaker than expected data recently asindicative of a weaker than expected underlying trend and not jus

short-term factors. Such changes would reinforce the impression

that Fed officials are in no rush to start withdrawing stimulus. We

do not expect any significant change to the inflation projections

this time.

130

150

170

190

210

05 06 07 08 09 10 11 12

CoreLogic home pr ice index: total

CoreLogic home price index: excluding distressed sales

in dex, January 2000=100, nsa

Apr

61

72

83

94

105

06 07 08 09 10 11

FHFA house price index (purchase only, sa)

S&P/Case Shi ller index (composite 20, sa)

CoreLogic home pr ice index (nsa)

Radar Logic house price index (nsa)

index, June 2006 = 100

Mar/Apr*

8/6/2019 MfM Jun 17 2011

11/13



JOBLESS CLAIMS (THU, JUN 23, 08:30)

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

WKLY4-WKAVG

REGULAR EXTENDED* TOTAL

sa nsa sa** sa**

MAY 14*** 414 440 3718 4043 4238 7956

MAY 21 429 440 3747 4000 4268 8015

MAY 28 426 427 3696 3885 4191 7887

JUN 4 430 425 3675

JUN 11 414 425

JUN 18*** CONS 412 421

MF 415 421

*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

Jobless claims are down from as high as 478,000 in late April, but

still up from just below 400,000 in March. The pattern suggests

net weakening, albeit not nearly to the degree implied by the May

employment report. Claims remain important to watch.

Some, but not all, of the recent spike in claims has been

reversed.

Source: Department of Labor and MF Global

NEW HOME SALES (THU, JUN 23, 10:00)MAY EST

FEB MAR APR CONS MF

NEW HOME SALES (000s, saar) 278 301 323 310 295

%m/m -10.3 8.3 7.3 -4.0 -8.7

%y/y -19.2 -21.8 -23.1 5.0

MONTHS' SUPPLY 7.9 7.2 6.5

MEDIAN PRICE (%y/y) -1.8 -4.6 4.6

Source: Census Bureau, Bloomberg, and MF Global

New home sales probably reversed the rise in last months report

consistent with the underlying trend being no better than flat.

Indeed, the early-June homebuilder survey suggested net

weakening. Sales averaged a 296,000-unit annual rate in Q1,

identical to the pace in the second half of 2010.

MONETARY AGGREGATES (THU, JUN 23, 16:30)

MAY 23 MAY 30 JUN 6 JUN 13

M1 (billions of $, saar) 1939 1961 1939

%ch from 13 weeks

ago, saar13.7 13.4 15.7

%y/y 14.0 14.7 13.5

M2 (billions of $, saar) 9005 9018 9026

%ch from 13 weeks

ago, saar5.1 4.9 4.8

%y/y 5.1 5.0 5.2

Source: Federal Reserve Board

At 5.2%, the y/y change in M2 is up from 4.3% in Q1 and 2.3% in

all of 2010.

FED BALANCE SHEET (THU, JUN 23, 16:30)

billions of dollars unless noted, nsa JUN 1 JUN 8 JUN 15 JUN 22

TOTAL FED ASSETS 2793 2815 2832

%y/y 19.4 20.6 20.6

SECURITIES HELD OUTRIGHT 2569 2592 2609

US TREASURIES 1532 1555 1576

FEDERAL AGENCY 119 119 118

MORTGAGE-BACKED 918 918 915

OTHER LOANS 14 13 13

PRIMARY CREDIT 0 0 0

TALF 14 13 13

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

III***)64 62 61

CENTRAL BANK LIQY SWAPS 0 0 0

OTHER ASSETS 146 149 149

MONETARY BASE (2-wk avg) 2601 2665 2665

% y/y 29.3 32.9 32.9

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

TheFeds $600 billion purchase plan will likely boost total Fedassets to around $2.875 trillion.

270

370

470

570

670

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11

4-week average Weekly

in itial claims, 000s, sawr

Jun 11

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12/13



DURABLE GOODS (FRI, JUN 24, 08:30)MAY EST

FEB MAR APR CONS MF

TOTAL ORDERS (%m/m, sa) -1.1 4.6 -3.6 1.6 1.7

EX TRANSPORTATION -0.6 2.6 -1.6 1.0 1.0

EX DEFENSE 0.6 4.2 -3.8 1.7

EX CIVILIAN AIR & DEFENSE -1.0 4.3 -2.2 0.8

NONDEF. CAPITAL GOODS 4.8 5.0 -7.1

EX AIRCRAFT -0.1 5.4 -2.3 1.1 2.0

TOTAL SHIPMENTS (%m/m, sa) 0.0 3.1 -1.3

NONDEF. CAP GOODS EX AIR -0.2 3.7 -1.5

INVENTORIES (%m/m, sa) 1.2 1.7 0.9

INVENTORY-TO-SALES RATIO 1.32 1.30 1.32

Source: Census Bureau, Bloomberg, and MF Global

Durable goods orders have alternated between up and down for

10 consecutive months. The streak probably continued in May

(with a rise). On balance, the rate of growth in orders appears to

have slowed in recent months.

Orders for nondefense capital goods excluding aircraft have

tended to be weak in the first month of each quarter recently,

followed by a rebound in the next two months. Consistent with

that pattern, we forecast a solid rise in May.

Source: Census Bureau

GDP (FRI, JUN 24, 08:30)

11Q1 3R

EST

% q/q, saar, unless noted 10Q3 10Q411Q1

2ND

EST

CONS M

REAL GDP 2.6 3.1 1.8 1.9 2

FINAL SALES 0.9 6.7 0.6 0

DOMESTIC FINAL SALES 2.6 3.2 0.7 0

NET EXP. (contr. % pts.) -1.7 3.3 -0.1 0

INVENTORIES (contr. % pts.) 1.6 -3.4 1.2 1

INVENTORIES (ch, bil saar) 121 16 52 5

CONSUMPTION 2.4 4.0 2.2 2.2 2

BUSINESS FIXED INVEST 10.0 7.7 3.4

STRUCTURES -3.6 7.7 -16.8

EQUIP & SOFTWARE 15.4 7.7 11.6

RESIDENTIAL INVESTMENT -27.3 3.3 -3.3

EXPORTS 6.7 8.6 9.2

IMPORTS 16.8 -12.6 7.6

GOVERNMENT 3.9 -1.7 -5.1

FEDERAL 8.8 -0.3 -7.9

STATE & LOCAL 0.7 -2.6 -3.2

NOMINAL GDP 4.6 3.5 3.8 4

CHAIN PRICE INDEX 2.1 0.4 1.9 1.9 1CORE PCE PRICE INDEX 0.5 0.4 1.4 1.4 1

REAL GDP (%y/y) 3.2 2.8 2.3 2

NOMINAL GDP (%y/y) 4.5 4.2 3.9 4

CHAIN PRICE INDEX (%y/y) 1.2 1.3 1.6 1

CORE PCE PRICES (%y/y) 1.2 0.8 0.9 0

PERSONAL SAVING RATE (%) 6.0 5.4 5.1 5

NOM WAGE INCOME 3.5 1.7 3.3

(%y/y) 2.9 3.0 3.7

10Q3 10Q4 11Q1

REAL GDI* (%q/q, saar) 1.2 3.9 1.2

(%y/y) 3.7 3.0 2.2

BOOK PROFITS, AFTER TAX (%q/q, saqr) 2.4 -3.3 5.9

(%y/y) 27.2 11.4 5.8

PROFITS FROM CURRENT

PRODUCTION, PRE-TAX

(%q/q, saqr)

1.6 2.3 1.3

(%y/y) 26.4 18.3 8.5

*Nominal GDI deflated by MF Global using GDP price indexSource: Bureau of Economic Analysis, Bloomberg, and MF Global

The Q1 growth rate will probably be revised up, mainly reflecting

new data on foreign trade and inventories.

46

50

54

58

62

6670

05 06 07 08 09 10 11

3-month average Monthly

orders for nondefense cap ital goods ex air, $bil , samr

Apr

8/6/2019 MfM Jun 17 2011

13/13



June 13July 8MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY

13

(09:30) Richmond Feds Lacker(11:00) 4-wk BillAnnouncement(11:00) Fed purchase op(11:30) 3- & 6-mth Bill Auction(19:00) Dallas Feds Fisher

14

(07:30) May NFIB(07:45/08:55) Store Sales(08:30) May PPI(08:30) May Retail Sales(10:00) Apr Inventories(11:00) Fed purchase op(11:30) 4-wk Bill Auction(15:30) Fed ChairmanBernanke speaks on fiscalsustainability, in Washington(text, no Q&A)

15

(07:00) Mortgage Apps(08:30) May CPI(08:30) Jun NY Fed(09:00) Apr TICS(09:15) May Indust Prod(10:00) Jun NAHB HMI(11:00) Fed purchase op

16

(08:30) Initial Claims(08:30) May Starts/Permits(08:30) Q1 Current Account,including annual revision(10:00) Jun Phil Fed(11:00) 3- & 6-mth Bill & 30-yr(r) TIPS Announcement(11:00) Fed purchase op(13:10) Dallas Feds Fisher(16:30) Fed Bal Sheet/Money

17

(09:55) Jun prelim Michigan(10:00) May Lead Ind(11:00) Fed TIPS purchase op

20

(11:00) 4-wk BillAnnouncement(11:00) Fed purchase op(11:30) 3- & 6-mth Bill Auction(14:00) Fed purchase op

21

(07:45/08:55) Store Sales(10:00) May Exist Home Sales

4900Ke/-3.0%m/m(11:00) Fed purchase op(11:30) 4-wk Bill Auction

22

(07:00) Mortgage Apps(10:00) CBO releases 2011Long-Term Budget Outlook(10:00) Apr FHFA 0.0%e(12:30) FOMC Statement(14:15) Fed ChairmanBernanke to hold post-FOMCmeeting press briefing

23

(08:30) Initial Claims 415Ke(10:00) May New Home Sales

295Ke/-8.7%m/m(11:00) 3- & 6-mth, & 1-yr Bill,2-yr, 5-yr & 7-yr NoteAnnouncement(11:00) Fed purchase op(13:00) 30-yr (r) TIPS auction(16:30) Fed Bal Sheet/Money(19:00) Chicago Feds Evans

24

(08:30) May Durables 1.7%eEx trans 1.0%e

(08:30) Q1 GDP (3rd

est) 2.3%e(11:00) Fed purchase op

27

(08:30) May Personal Income(10:30) Jun Texas Mfg.(11:00) Minneapolis FedsKocherlakota(11:00) 4-wk BillAnnouncement(11:00) Fed purchase op(11:30) 3- & 6-mth Bill Auction(13:00) 2-yr Note Auction(13:00) KC Feds Hoenig

28

(07:45/08:55) Store Sales(09:00) Apr S&P/CS(10:00) Jun Conf. Board(10:00) Jun Richmond Fed(11:00) Fed purchase op(11:30) 4-wk & 1-yr Bill Auction(12:00) Dallas Feds Fisher(13:00) 5-yr Note Auction

29

(07:00) Mortgage Apps(10:00) May PHSI(10:00) Jun Help Wanted(11:00) Fed purchase op(13:00) 7-yr Note Auction

30

(08:30) Initial Claims(09:00) St. Louis Feds Bullard(09:45) Jun Chicago PMI(10:00) Jun Milwaukee Fed(11:00) Jun KC Fed(11:00) 3- & 6-mth BillAnnouncement(11:00) Fed purchase op(13:00) KC Feds Hoenig

1

(09:55) Jun Michigan(10:00) May Construction(10:00) Jun Mfg ISM

Jun Lt Vehicle Sales

4

Independence Day

Markets closed

5

(10:00) May Factory Orders(11:00) 4-wk BillAnnouncement(11:30) 3- & 6-mth Bill Auction

6

(07:00) Mortgage Apps(07:45/08:55) Store Sales(08:30) Jun NonMfg ISM(11:00) Fed purchase op(11:30) 4-wk Bill Auction

7

(08:15) June ADP(08:30) Initial Claims(11:00) 3- & 6-mth Bill, 3-yr, 10-yr (r) Note, & 30-yr (r) BondAnnouncement(12:30) KC Feds Hoenig

Jun Chain Store Sales

8

(08:30) Jun Employment(15:00) May Consumer Credit

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. (2011) 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.

mfm jun 17 2011

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