Inflation, What Inflation?
That’s the message the bond market sent as it rallied to
nearly match or exceed contract highs, just one day before the Fed’s FOMC
monetary policy meeting, interest rate decision, and likely interest-rate cut
Tuesday.
Federal fund futures contracts priced in an 80%
chance of a .50% cut in the fed funds target rate, ahead of the Fed’s FOMC
meeting tomorrow. This would leave the key monetary-policy tool at 2.50%.
Many economists believe the Fed may act even more strongly to buffer a
wounded economy still reeling from the shock of the 911 terrorist attacks.
Some economists are forecasting the Fed will drive the fed funds target rate
down to 2%, a level not seen in nearly 40 years.
The Fed took immediate action to buoy the market in
the aftermath of the attack, aggressively enacting a half-point, between
meetings cut in the fed funds target rate. But as pointed out in Mid-day
Futures Alerts and in Futures Recaps following the Sept. 14 rate cut,
once short rates drop below the rate of inflation, that sparks inflation.
With inflation at 2.7%, any drop below 2.50% poses risks. A
cut of an additional 50 basis points would inject even more liquidity into
the market and would total 100-basis points of rate cuts in two weeks, a
potentially tremendously positive jolt for the economy in such a short
period of time.
But the prospect of inflation erodes the value of
long-dated fixed income products. T-bonds tanked in the days after the Fed’s
Sept. 14 intersession cut for precisely this reason. A rate cut of 50 basis
point tomorrow could have the same impact.
The long end has been in a momentum pulse, but is
overbought after having rallied for seven consecutive days. 10-year notes
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and T-bonds
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trade to a new high and decline in a same-day Turtle Soup sell pattern
tomorrow. Stand by.
Debt futures responded to recent inertia from rebound
rallies that have placed 10-year notes
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List and T-bonds
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New 10-Day Highs List. T-bonds made good on their Off The Blocks
long setups and closed on their highs of the day, up 17/32 at 106 1/32.
Economic data are beginning to show bottoming action:
The regional NAPM-Chicago and today’s NAPM both came in stronger than
expected. The market also logged a follow through day, suggesting a low
may be in place for the stock market, another encouraging sign that would
take the pressure off the Fed to remain as aggressive in the remaining
rate-policy meetings this year.
Although some economic pundits have forecasted rates
of 2.00%, the more reliable fed funds
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eased off the highs it set two sessions ago, where it forecast a
“for-sure” overnight rate of 2.25% by Christmas. The chance of
such a cut by December has dropped to 74%. If the Fed only cuts rates a
quarter tomorrow, bonds on the other hand, could see new highs as that would
remove some of the inflation threat.
The worst showing in over three years in the Tankan
Survey, Japan’s index of business confidence, is prompting the market to
focus on the downside in the yen and to heed the Bank of Japan’s advice to
stop buying yen (the BOJ intervened at least six times in just over a week
to weaken the yen). The yen closed down .003 at .8362.
Also from the Momentum-5
List, the
British pound
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high incurred on the day of the 9/11 attack. Such spikes often act as
resistance (or support, if a low was made) on subsequent retests. Pounds
closed up .0054 at 1.4722.
Corn
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cup and handle pattern, gapping lower. Corn was poised for a
larger-than-normal move based on its Multiple Days Low
Volatility reading and closed down 4 at 210 1/2. Early reports suggest good
yields.
October lean hogs
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daily limit, up 2.000 at 60.600, after questions arose following the USDA’s
hogs and pigs report Friday which showed a surprising 1.0 million head fewer
hogs than the prior two quarterly reports. The report may have also impacted
corn’s slide today, as fewer hogs implies less demand.