Still Kickin’

  • January 12, 2001
  • Marc Dupee

The economy is not as weak as everybody’s been saying, or
so imply economic data released today on inflation and retail sales. 

The Producer Price Index (PPI) came in higher-than-expected and retail sales rose in December despite slower Christmas sales.
The reports suggest that there is a slightly higher risk of inflation and that
the economy is not slowing as rapidly as feared. Both reports worked to reduce
the chance that the Fed would cut interest rates by a widely anticipated 50-basis-points by month’s end. Higher inflation and higher oil prices–nearby oil closed above
$30–give the Fed slightly less room to cut rates and a moderately cranking
economy would help remove the need for the Fed to take the unprecedented step of
lowering interest rates by a full percent (100 basis points) in one month. The
Fed under Alan Greenspan has never cut rates 100 points in just one month.

One of the best Fed watchers, Tony Crescenzi, said on TradersWire
that, “Importantly, Fed President Ferguson said he expects economic growth
to be between 2% and 3% in 2001. Ferguson is the third FOMC member to forecast
as such this week, indicating that the Fed’s official view on the economy is far
removed from the recession talk widely circulating in the markets. This augurs
for a 25-basis point rate cut and not 50 at the January 30-31 FOMC meeting.”

At its current price of 94.370, the February federal funds futures
(
FFG1 |
Quote |
Chart |
News |
PowerRating), one of the most accurate predictors of Fed moves, is showing that
the market is pricing in a 70% chance of a 50-basis-point cut, down from an 88%
after yesterday’s close. (Click
here to see Fleckenstein’s article to learn for yourself how to make this
easy calculation). 

In last week’s Trade
of The Week on Beginning
Traders, I profiled one of Crescenzi’s recent bond trades as well as showed
an interesting trade setup in the fed funds rates that would allow a trader to
take advantage of just a 25-basis-point cut. 

Interest rate futures traded a shortened session and were pressured by the
economic reports as well as the heavy supply of competing corporate debt.

T-bonds
(
USH1 |
Quote |
Chart |
News |
PowerRating) have dropped sharply in the past three sessions and fell
another 26/32 to 102 29/32 today.

10-year notes
(
TYH1 |
Quote |
Chart |
News |
PowerRating) gave back 24/32 to 104 11/32.

The 2464-89 resistance that Carolyn Boroden wrote about in recent Futures
Perspective commentaries became key support in today’s market as 2491 was
the low tick of the session and spurred the market to a 124-point, intraday
rally. Stock index drifted lower after bonds made their pre-Martin Luther King
Jr. holiday early close. 


Nasdaq 100 futures
(
NDH1 |
Quote |
Chart |
News |
PowerRating) closed 27.50 higher at 2540.00,
S&P futures
(
SPH1 |
Quote |
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News |
PowerRating) fell 4.20 to 1330.30, and 


Dow futures
(
DJH1 |
Quote |
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News |
PowerRating) sank 55.0 to 10,595.0.

A second month of stronger-than-expected manufacturing results from the United
Kingdom hammered
British pound
(
BPH1 |
Quote |
Chart |
News |
PowerRating) futures. The stronger statistics are seen as
decreasing the Bank of England’s capacity to lower interest rates. Higher
interest rates increase the demand for sterling-denominated assets. March
pounds fell .0164 to 1.4786.

February crude oil
(
CLG1 |
Quote |
Chart |
News |
PowerRating)
from the

New 10-Day Highs List, continued its momentum run to go out a dime off the
high. This contract worked out as an Off The Blocks
entry, providing a limited-risk entry above the opening range for a move back up
to the psychologically critical $30 a  barrel level prior to next week’s
OPEC meeting that is widely expected to result in output cuts of 1.5 to 2.0
million barrels a day. 

From the Momentum-5
List,
unleaded gasoline
(
HUG1 |
Quote |
Chart |
News |
PowerRating) rallied for (essentially) its 11th
consecutive day to a close .0135 higher to .9008.

March

silver
(
SIH1 |
Quote |
Chart |
News |
PowerRating), rallied 6.2 to 465.5 after stocks of Comex silver fell by 350,000
ounces.