The Chairman Moves Markets

February 13, 2001
Marc Dupee

Financial futures gyrated wildly today as traders
digested testimony presented by Federal Reserve Chairman Greenspan before the
Senate Banking Committee on his perception of the state of the economy. In
summary, Greenspan’s comments suggested that the economy is not in as bad of
shape as the stock, bond and currency markets had been discounting, and
financial futures re-aligned in response to Greenspan’s comments. For a full
analysis of what Greenspan said today by one of the best Fed watchers, see Crescenzi
On T-Bond Futures.Â

Debt futures initially rallied as an analysis hit newswires that Greenspan’s prepared statements implied the Fed would continue
aggressively cutting interest rates. But a closer read of the six-page document
showed that the Fed chief believes the worst (of the slowdown) is behind the
American economy and that technology will continue to perform well. T-bonds
(
USH1 |
Quote |
Chart |
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PowerRating)
swung over a range greater than one point, typical on days when the Chairman
presents the twice-yearly testimony, before settling 6/32 lower at 104 /32.

10-year notes
(
TYH1 |
Quote |
Chart |
News |
PowerRating) fell 5/32 to 105 5/32.Â

March federal funds futures
(
FFH1 |
Quote |
Chart |
News |
PowerRating) priced in a
reduced chance of a 50-basis-point rate cut by the time of the Fed’s next FOMC
meeting in March. Prior to the meeting, the Fed had priced a 100% chance of a
50-point move.Â

Stock index futures initially made good on three up
signals from the
Market
Bias Indicators Page before realizing that the Fed sounded like it would
back off the interest rate chopping block. Lower interest rates are strongly
correlated with rising stock markets.
Nasdaq 100 futures
(
NDH1 |
Quote |
Chart |
News |
PowerRating) traded over a 172-point range to make good on
their combined Implosion-5
and 6/100 Low Volatility
readings, settling at their second lowest close of the year, down 75.50 at
226.00.Â

Comments from Fed Chair Greenspan also worked to boost the dollar. Greenspan
told the Senate Banking Committee that the “central tendency of individual
FOMC members’ forecasts for GDP growth this year” are in the 2% to 2.5%
range. Surprisingly strong retail sales numbers from the US and a corresponding unexpected drop in retail sales figures from Germany (the fourth straight such
drop) supported Greenspan’s implication that the US will not slip
into recession and caused observers to reassess that the US economy is not as
bad as has been feared.Â

A relatively better-performing US economy is positive for
the dollar and also means the Fed may not have to be as aggressive in reducing
interest rates to keep the economy from grinding to a halt. Higher relative
interest rates in the US are dollar positive as the higher rates tend to
heighten demand for dollar-denominated assets.

The prospect of a not-so-bad economy also spurred a rally
in the New York copper pit. An industrial metal, copper futures are sensitive to
perceptions about economic growth and Greenspan’s altered view incited a 1% move
before March copper
(
HGH1 |
Quote |
Chart |
News |
PowerRating)Â settled
.70 higher at 82.45.

In the softs, cocoa
(
CCH1 |
Quote |
Chart |
News |
PowerRating) continued a rally I pointed out
earlier in the session in the Mid-Day
Futures Alert. The leading Momentum-5
market, cocoa rallied out of its Pullback From Highs
setup and closed 36 higher at 1073.

The Chairman Moves Markets

BUY THE FEAR, SELL THE GREED

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