Forecasting The Fed
Now that the Fed has responded to the overwhelming
evidence that the economy is slowing too fast and scurried to cut interest rates
to ward off a looming recession, what is the likely course and magnitude of the
next interest rate move or moves if any?Â
The Fed wielding its primary monetary policy tool–the
federal funds interest rates, the rate institutions charge each other for
overnight loans–cutting 50 basis points (1/2%). The Federal Funds
futures has been one of the most reliable predictors of the Fed’s interest rates
moves, and this market is providing important signs of what the Fed’s next moves
will likely be. This morning, the February contract
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chance that the Fed will cut an additional 50 basis points at its meeting on the
last day of this month. (To learn how to make this simple calculation
yourself, see Loren Fleckenstein’s article titled Forecasting
The Fed With Federal Funds Futures). The June contract is
currently showing a 76% chance of an additional 50 basis-point cut by the
summer.Â
Estimates of how much OPEC may cut its output at its
upcoming January 17 meeting range as high as 1.5 million barrels per day.
Algeria’s Oil Minister Chakib Khelil said today that a 500,000-barrel cut could
come within the next few days. OPEC has a policy of striving to keep the price
of a basket of seven of its crude oils–an OPEC barrel–between $22 and $28 a
barrel. An OPEC barrel rose .21 to 22.61.Â
Both crude oil and unleaded gasoline are rallying for a
fourth consecutive day. Feb. unleaded gasoline
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made it onto the New 10-Day Highs List
and is remaining above its 50-day.Â
Natural gas is higher after the weekly American Gas
Association’s weekly industry report showed national stockpiles fell last week.
The February contract
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5%.Â
This morning’s National Association of Purchasing
Managers Non-Manufacturing data release came in lower than expected this
morning. This report focuses on the service component of the economy and
is considered something a leading indicator of economic activity. The surprisingly large drop implies that
the Fed is correct to lower interest rates in defending against
"recession risk."
The currencies retraced big moves from yesterday in the
overnight cash markets and the futures responded by gapping higher. The euro FX futures
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and
Swiss francs
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moves overnight. The Swiss franc futures remain on the Momentum-5
List and euro FXs recently came off the list but have been in a momentum
impulse phase.