Pro Growth Policy
Friday’s surge in the unemployment rate has heightened speculation the
Fed could enact another inter-meeting interest rate cut. If the
Fed were to cut rates, a move suggested by TradingMarkets bond honcho Tony
Crescenzi, it would be the third cut this year outside the regularly
scheduled FOMC meetings.
Whether the Fed cuts rates prior to its October 2 meeting or not, the
market is expecting another rate cut soon. The most accurate predictor of
likely Fed rate action, the federal funds futures contracts, are pricing in
a for-sure 25-basis-point cut by the end of the year. The December contract
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chance of a 50-basis-point cut by Christmas. The fed funds so-called
“target” rate, the most potent weapon of the Fed, would then stand
at 3.00%.
Stocks and the dollar are rallying on what is perceived will be
aggressive action to stimulate economic growth in the US. Stock index
futures are coming off contract lows after a strong hint of a possible
reaction from the five up arrows from the Market
Bias Indicators Page. Taken together, the signals provide a
stronger-than-average chance of a turnaround from the index future’s
lows.Â
The long end of the yield curve is falling 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 real inflation. When rates fall below the real
inflation level, historically, that is very inflationary. T-bonds
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and
10-year notes
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inflation will erode their fixed-income returns over their long
maturities.Â
As mentioned in last Friday’s Futures Market Recap, 10-years setup in a
Turtle Soup Plus One
Sell
pattern and Dec bonds setup in a similar pattern without actually trading
to a new 20-day high (missed it by two ticks). Both debt futures have sold
off from highs.Â
As stocks rally, dollar index futures
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regaining lost ground. The US is seen as being 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.