The Federal Reserve announced Wednesday that it cut the Fed funds target rate by 25 basis points to bring the key interest rate to 2.00%. The discount rate was also cut by 25 basis points to 2.25%. In an accompanying statement, the Fed said "substantial" easing should promote growth, but that economic growth "remains weak." The Fed said credit and housing will weigh on economic growth over the next few quarters, adding that financial markets will remain under "considerable stress."

The vote to cut the target rate was 8-2, with Richard Fisher and Charles Plosser preferring no change in the target for the federal funds rate at this meeting.

Rudy Narvas, a strategist at 4Cast, said the statement was slightly more dovish than economists had expected. He said it hinted at a pause in the next meeting, as expected, particularly by removing the statement that "downside risks remain" and replacing it with a statement that "substantial easing of monetary policy to date" should help promote moderate growth.

U.S. GDP growth came in slightly above forecasts in the advance report for the first quarter of 2008 as the economy expanded at a sluggish 0.6% rate, repeating the performance seen in the final quarter of 2007, according to data released Wednesday by the U.S. Bureau of Economic Analysis. The consensus was looking for a 0.5% growth rate.

The increase in real GDP reflects positive contributions from personal consumption for services, private inventory investment, exports of goods and services, and federal spending. Offsetting these advances were negative contributions from residential fixed investment and personal consumption expenditures for durable goods.

"This was a slightly better-than-expected report, but one should not take too much comfort in the numbers," said Charmaine Buskas, senior economics strategist at TD Securities. "The writing is on the wall and there are continued signs that the economy is struggling against significant headwinds."

The NAPM-Chicago business barometer remained below growth levels for the third consecutive month in April, but the headline has been coming closer to the 50-level indicating growth for two months now. The headline PMI came in at 48.3 in April from a reading of 48.2 in March, against expectations that it would fall to 47.5. Aside from the headline index, the big news was the considerable decline in the employment index, which fell to a reading of 35.3 from 44.6 in March to mark the fifth consecutive month that employment has been in slowdown.

According to the U.S. Institute for Supply Management (ISM), the manufacturing index for Milwaukee rebounded to 48.0 in April compared to March's reading of 47.0, ending a six-month fall in the indicator. The prices paid index rose to 80.0 from the previous month's 76.0 level.

Speaking on Bloomberg Television later in the day, U.S. Treasury Secretary Paulson said the U.S. economy is facing "significant headwinds" and short-term "trouble," one of his strongest warnings of a slowdown yet. Although Paulson signalled near-term concerns, he said the long-term fundamentals of the U.S. economy are "strong" and that markets are closer to the end of credit problems than the beginning. Still, he said there could be "bumps" in the road to recovery.

The U.S. Employment Cost Index grew 0.7% in the first quarter, the Department of Labor reported, in line with expectations and a repeat of the fourth-quarter figures. Wages and salaries rose 0.8% while benefit costs ticked lower to 0.6%.

Private non-agricultural employment in the United States increased by 10k jobs in April, according to a report from Automatic Data Processing Inc. The figure was well above economists' expectations for a pullback of 60k jobs. The ADP report runs in contrast to expectations for Friday's nonfarm payrolls report from the Bureau of Labor Statistics, the benchmark employment figure for the United States.

U.S. crude oil stockpiles increased by 3848k barrels in the week ending April 25, according to data released Wednesday from the Department of Energy, significantly higher than the consensus estimate for a 950k increase. Gasoline inventories were expected to decline by 1000k barrels but declined 1483k. Distillate inventories increased 1129k against expectations for a 400k fall.

Weekly mortgage applications in the United States fell substantially for the second week in a row in the week ending April 25, according to data from the Mortgage Bankers' Association on Wednesday, which said applications fell 11.1%. In the previous week, applications fell 14.2%. The average loan size was $230.2k, above the previous week's $229.2k.

The U.S. Treasury Department announced on Wednesday its intentions to auction $15.0 billion in 10-year notes and $6.0 billion in 30-year bonds in its May 2008 quarterly refunding. These amounts will be used to reimburse $74 billion in marketable securities, maturing on May 15, 2008, and to pay down approximately $53 billion in debt.

In Canada, the country's gross domestic product contracted by 0.2% in February, tugged downward mainly by sluggishness in manufacturing and wholesale trade, Statistics Canada reported. The slide was steeper than expected by analysts, whose consensus forecast was for GDP to stay in positive range at +0.2% following January's 0.6% increase. The goods producing sector was down 0.4% from the month before, with construction the one bright spot with a 0.2% rise. Manufacturing activity declined 0.7%.

"The contraction in the latest three month period is the deepest since this series started in 1997 and the first negative print since November 2001, when U.S. economy was last in recession," noted Michael Gregory, senior economist from BMO Capital Markets.

The price Canadian manufacturers pay for raw materials ramped up 6.6% in March, Statistics Canada reported Wednesday, largely due to soaring fuel prices. The increase was more than triple the forecast of analysts who had expected to see the raw materials price index (RMPI) rise 2% month-over-month. It was the strongest rise seen in the RMPI since September 1990.

Canadian exports to the U.S. via road, rail and pipeline were 7.8% higher in February as total trade between the countries increased 7.0% in the month, according to data released from the U.S. Bureau of Transportation Statistics. Canadian surface exports to the U.S. increased 20.3% year-over-year in current dollar terms.

Bank of Canada Governor Mark Carney and Senior Deputy Governor Paul Jenkins appeared before the House of Commons finance committee today. Carney said the U.S. economic downturn appears to be deeper and more protracted than expected and that softness in U.S. domestic demand is likely to continue. Carney said the U.S. economy is expected to grow at about 1% in 2008.

Carney added that the Bank of Canada has some concerns about long amortization mortgage products and that he expects a further moderation in Canadian home prices. He also said further stimulus will depend on the global economy and domestic demand and that Canadian banks are well-capitalized versus international banks.

Iran will no longer conduct oil transactions in U.S. dollars, one of the country's top Oil Ministry officials said Wednesday. Oil Ministry official Hojjatollah Ghanimifard was quoted on state television as saying, "The dollar has completely been removed from our oil trade ... Crude oil customers have agreed with us to use other currencies (in the trade)."

Speaking in Germany, European Central Bank President Jean-Claude Trichet said that Europe needs to increase flexibility on wages and that second-round inflation effects must be avoided. Trichet added that the ECB is paying careful attention to current wage negotiations.

In overnight news, the Bank of Japan held rates unchanged at 0.50% as expected, citing a continuing weakening economic situation both locally and abroad, followed by promises to act flexibly versus uncertainties surrounding the Japanese economic outlook. The BOJ also cut its GDP target to 1.5% from 2.1%, adding that it expects core CPI to grow 1.1% rather than the previous 0.4% growth expected for 2008. The BOJ also said GDP and core CPI would average around 1.7% and 1.0% respectively in 2009.

Consumer confidence in the UK declined further in April, according to a report from GfK on Tuesday evening, whose index of consumer confidence declined to a reading of -24 despite calls for a -20 level. In March, the index stood at -19.

The euro zone consumer confidence indicator remained at -12 in April, unchanged from the previous month's reading and higher than the -13 figure expected by economists.

Germany's seasonally adjusted unemployment rate came in at 7.9% in April, unchanged from the previous month after it was upwardly revised from 7.8%, the Federal Labor Agency reported. Economists had expected a reading of 7.8%.

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