US RATE FUTURES-Weak ISM points to big Fed rate cut

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By Ros Krasny

CHICAGO, Dec 3 (Reuters) - Financial dealers boosted bets on an aggressive rate cut from the Federal Reserve this month after an unexpectedly sharp decline in a survey of the vast U.S. services sector.

Short-term interest rate futures fully price a 50 basis point rate cut, which would take the Fed's benchmark lending rate to 0.50 percent from 1 percent.

The implied prospects for a cut in the fed funds rate to 0.25 percent briefly hit 54 percent versus 38 percent late on Tuesday. Bets in fed funds options also show an outside chance that the Fed will cut the funds rate to zero.

The Institute for Supply Management's November services index was 37.3, far below the consensus forecast of 42.0, suggesting weakness across a range of industries from banking to retailing to travel and entertainment.

Every major component of the report hit a record low, although the survey has only been compiled since 1997.

Rate futures prices were bid up earlier by fresh news of weakness in the job market, notably from the ADP National Employment Report.

Analysts seized on a slide in the ISM employment index to 31.3 from 41.5 in October.

"The ISM non-manufacturing data was extraordinarily weak. Every component is dreadful, notably a very soft employment number that with ADP will affirm a November nonfarm payroll consensus heading down to the negative 350,000 area," said Alan Ruskin, chief international strategist at RBS Greenwich Capital in Greenwich, Connecticut.

The ISM trend supports assessments that the current economic downturn could be especially long and deep.

"The (ISM) low in 2001 was 44.8, so the latest data suggests this recession will be significantly deeper than the last, though that was generally accepted," said David Sloan, economist at 4CAST Ltd in New York.