How They’re Speculating On Growth
Friday’s surge in the unemployment rate heightened speculation the Fed
could enact another “inter-meeting” interest rate cut. If the Fed
were to cut rates prior to their scheduled, October 2 meeting, a move
suggested by TradingMarkets bond honcho Tony Crescenzi, it would be the
third cut this year outside a regularly scheduled FOMC meeting.
Whether the Fed cuts rates prior to its October 2 meeting or not, the
market is expecting another rate cut soon, and speculators reacted
accordingly, driving up stock index futures and the dollar while selling
futures on the long end of the yield curve (i.e., bond and note futures).
The market’s mindset is that last month’s surge in unemployment will make
the mounting number of jobless less confident about their economic
well-being and will thereby make them less willing to spend. Consumer
spending accounts for about two-thirds of gross domestic product (GDP) has
been about the only thing keeping the economy from slipping into recession.
This will likely force the Fed to react strongly, possibly spurring a rate
cut of as much as .50% in coming months.Â
The most accurate predictor of likely Fed rate action, the federal funds
futures contracts, priced in a “done deal” 25-basis point cut
(.25%) by the end of the year today. And the December contract
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traded to a contract high, pricing in as high as an 84% chance of a 50-basis
points cut by Christmas. The fed funds so-called “target” rate,
the most potent weapon of the Fed, would then stand at just 3.00%.
Stock index futures rallied on the speculation that the Fed will actively
pursue such a “pro-growth” monetary policy, a view reflected in
the fed funds futures contracts. Stock index futures came off contract lows,
and gave a strong hint they could rally by their five up arrows from the Market
Bias Indicators Page. Taken together, the signals provide a
stronger-than-average chance of a turnaround from Friday’s 52-week low
closes in the Nasdaq 100 and S&P 500 futures contracts.Â
As stocks rallied, dollar index futures
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well, regained recently lost ground. The Fed’s perceived pro-growth stance
is seen as more proactive in stimulating economic growth than the world’s
other two major economic regions, Europe and Japan, a perception that could
continue to be a bonus to both stocks and the dollar.
However, the long end of the yield curve fell from contract highs.
Consider what is happening. If the Fed cuts rates to 3.00%,
that will be less than one-half of one percent above inflation. When rates
fall below the inflation level, historically, that is very inflationary. T-bonds
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and
10-year notes
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will erode their fixed-income returns over their longer maturities. T-bonds
fell 25/32 to 105 9/32 and 10-year notes slumped 8/32 to 106 19/32.
As mentioned in last Friday’s Futures Market Recap, 10-year notes setup
in a
Turtle Soup Plus One
Sell
pattern and Dec T-bonds setup in a similar pattern without actually trading
to a new 20-day high (missed it by two ticks). Both debt futures sold off
from highs.Â
Keep an eye on contracts that have recently been on either the Momentum-5
or
Implosion-5 lists. February 2002 pork bellies
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leading the list as recently as Friday but came off the list after a few
days slump. Today the contract rallied again, gaining 1.525 to 84.175, and
closing at the trigger of a Pullback From Highs pattern for tomorrow.
Bellies made good on an Off The Blocks
long entry, a pattern setup described in the Futures-Education-Patterns
section of TradingMarkets.Â