Rates Drop To Zero
At least “real” interest rates did today when the Federal Reserve cut
its federal funds target rate for the ninth time in as many months. The real
interest rate is the rate that remains after subtracting out inflation. And
with inflation running at 2.7%, the Fed’s 50-basis-point rate cut today to
2.5% actually left real rates negative.
Zero real interest rates could exert a potentially
huge positive impact on the economy, but much will depend on individuals’
and consumers’ purchasing and spending decisions made in light of rising
employment and the consensus that the economy will stall into
recession.
We saw the typical gyrations that often occur
following a Fed rate cut. S&P futures
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three-wave-and-go pattern, one Lewis Borsellino describes where the market
head fakes back and forth before making its decisive move in the fourth
wave. The SPZ held at the 61.8% level retracement of yesterday’s swing low
to this morning’s high, then surged 20 handles to close on their highs of
the day, up 12.20 at 1055.20.
Dow futures
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finished nominally green as well.
But a critical issue going forward will be the effect of real interest rates
on the long end of the yield curve. Historically, zero real rates spark
inflation, erode the value of longer-dated debt (like T-bonds), and drive
T-bond interest rates up. Higher long-term interest rates will hurt the key
housing and construction markets. And policy makers need the help of all
sectors to get the economy back in gear, so it still has to be worked out
how to keep long-dated rates down.
President Bush did his bit today to help calm
concerns that any economic stimulus package could make the
“inflation” matter worse. Bush said any economic stimulus package
from his administration would be designed to not raise
long-term interest rates. The market viewed this message bullishly, sending T-bonds
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contract highs, up 17/32 at 106 18/32. 10-year notes
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from the Momentum-5
List, also traded higher and made good on a Off The Blocks
long entry, a setup appropriate for momentum contracts.
December fed funds futures
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price in another quarter-point rate cut by Christmas and a 20% chance of
another 50-basis-point cut (to 2.00), also an inflationary sign.
The British pound
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falling off multi-month highs after the United Kingdom reported weakness in
key economic sectors. Similar to the US, Britain’s manufacturing sector had
been suffering while construction and services have been picking up the
slack. Reports today indicate both construction and services weakened last
month, pulling out two of the few remaining pillars of support under the
British economy, sterling negative. The pound closed down .088 at 1.4634.
Technically, the contract setup in a
Turtle Soup Plus One
Sell pattern and is making good on the setup.
Going the other way, October sugar
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its downside momentum indication (the
Implosion-5 List), and triggered an Off The Blocks
short entry. After making a new contract low, sugar shot up in the final
minutes to recoup all of a .20 loss and trade in positive territory before
slipping to close down .03 at 6.57.