Fri Aug 13, 2004
By Ros Krasny

CHICAGO, Aug 13 (Reuters) - U.S. short-term interest rate futures firmed on Friday as data renewed doubts about economic growth and suggested a slightly slower pace of Federal Reserve rate increases.

A lower than expected reading on consumer sentiment from the University of Michigan cemented gains made earlier on reports of low inflation in July and a ballooning U.S. trade deficit for June.

"The weakness in exports and a decline in confidence raise yellow flags about the performance of the economy," said Lynn Reaser, chief economist, Banc of America Capital Management, St. Louis.

The Michigan report for August was 94.0, below forecasts of 97.5 and the lowest since May.

While not an exceptional decline after two higher months, "the data does suggest consumers have taken note of the recent slowdown in employment growth," said David Sloan, analyst at 4CAST Ltd.

Earlier, July producer price index core inflation rose just 0.1 percent while the June U.S. trade deficit ballooned out to a record high $55.8 billion, against forecasts of $47 billion. The Commerce Department also revised May's deficit up to $46.88 billion from the previously reported $45.95 billion.

Worries about the economy's growth continue to be wrapped up with rising energy costs. Crude oil futures extended a string of record highs on Friday to hit $45.93 per barrel on the New York Mercantile Exchange.

Earlier on Friday, in an interview, Treasury Secretary John Snow indicated that energy prices had created "headwinds" for the economy. In a later interview, he indicated his view that geopolitical uncertainty may have accounted for between $6-$10 a barrel of the crude oil price.

Cary Leahey, senior U.S. economist at Deutsche Bank Securities, said that about $5 billion of the $8 billion slide in the U.S. trade balance was oil-related.

"It puts more pressure on (Fed Chairman Alan) Greenspan not to do anything on rates in September. But given a decent August employment report the Fed is going to raise rates again," Leahey said.

Analysts were busy marking down their second-quarter gross domestic product forecasts based on the trade data.

Glenn Haberbush, economist at Mizuho Securities, said in a research note that second-quarter real GDP growth would be revised down to 2.7 percent from 3.0 percent.

Interest rate futures remain below recent highs reached after the weak July payrolls report on Aug 6, when prospects for Fed rate increases dropped sharply.

Chances that the Fed will raise rates by 25 basis points at the Sept 21 meeting are at 70 percent, down from 72 percent on Thursday but up from 50 percent a week ago.

The implied year-end federal funds rate is 1.93 percent, down from 1.945 percent on Thursday. Expectations for 2005 rate increases have been scaled back as well.

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