But mortgage-backed securities prices should rise immediately in secondary markets in anticipation of these purchases, which should provide some relief for severely stressed capital positions in the banking system fairly quickly. We expect the banking system to receive another shot in the arm from the Federal Reserve—the FOMC is expected to reduce interest rates by 50 basis points before the end of October.

Next week will be a relatively light week for economic indicators. FOMC minutes from the meeting of September 16, to be released on October 7, will bring more light to bear on the Fed's rapidly evolving policy position. The FOMC appeared to have a neutral policy bias on September 16, but recent speeches from Fed officials indicate that the bias has moved towards an easing. We expect a huge improvement in the trade deficit in August, mainly due to sharply lower crude oil import prices and volumes.

KEY U.S. DATA RELEASES THIS WEEK

Friday, October 10 – Trade Balance (Aug.)

Global Insight: -$57.3 Billion
Consensus: -$59.0 Billion
Last Actual: -$62.2 Billion (Jul.)

What to Look For

·         Trade deficit to decline sharply on lower crude oil prices and import volumes.

Implications

The trade deficit should narrow sharply to $57.3 billion in August, from $62.2 billion in July. We expect the decline to be more than accounted for by lower oil imports, partly on lower volumes, but mostly on sharply lower prices. The rest of the deficit is likely to widen, since we do not expect exports to remain as exceptionally strong as in July. In particular, exports of motor vehicles and parts should tumble. Foreign trade remains a crucial support for economic growth, but export gains will slow as foreign economies weaken—and will not prevent the economy from falling into recession.