Surprise Slash?

  • December 18, 2000
  • Marc Dupee

The market entertained the idea that the Federal Reserve will cut interest
rates at its Open Market Committee tomorrow, spurring a rally in T-bond and Dow
futures. Many observers have been predicting an easing of the Fed’s policy
directive, but few have figured the central bank would cut rates before 2001. TradingMarkets bond honcho Tony Crescenzi has put the odds of an
“ease directive close to 100%” and at “50% for a surprise cut” in his commentary
this morning. 

Bonds and blue chips reacted in part to a Wall Street Journal article
highlighting this theme in a piece titled “A
Rapid Slowdown in the Economy May Speed The Federal Reserve.” The
article suggested that the Fed could become aggressive in ensuring that the economy does
not slow too much, raising the possibility that the Fed could make a preemptive
slash in rates sooner rather than later. The last GDP revision showed the economy had slowed 50% from
the previous quarter.

Alan
Greenspan and the other chiefs of the central bank may have to take aggressive
action to stave off a feared recession. The Fed is widely expected to ease its
policy directive to neutral and some are anticipating a cut in short-term
interest rates as early as tomorrow. Bonds (especially short-term instruments)
rallied and the
resulting impact of lower interest rates sparked a rally in financials and
some “old economy stocks,” kicking the DJIA and corresponding March
futures into the 200-plus column.

T-bonds
(
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(
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List, traded up half a point to fresh contract highs. The possibility of a
rate cut as soon as tomorrow left 10-years 6/32 higher at 104 25/32, while
T-bonds, the longer end of the yield curve, fell off the session highs to close
4/32 at 104 21/32.

Dow futures
(
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PowerRating) got a strong boost from the financials ahead of
tomorrow’s Fed meeting. Financial stock JP Morgan rallied 6 5/8 points and all of the Dow financial
components (such as AXP, C, and GE) posted gains. Major currencies reversed from
contract highs:
March dollar index futures
(
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PowerRating) rallied above their previous 20-day
low to make good on a Turtle Soup Plus One Buy
 setup while
euro FX futures
(
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to score gains out of a Turtle Soup Plus One
Sell setup. Dollar index futures still have etched an ominous double top
formation and have a ways to go in fulfilling a “peak-to-valley”
measuring objective. 

A cold snap in the middle
of the country and forecasts for more of the same bolstered energy contracts.
The OPEC president also said the cartel would cut output as early as January if
prices continue sliding. January crude oil
(
CLF1 |
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PowerRating) continued making good on a Turtle Soup Plus One Buy signal trigged
two days ago, adding .89 to 29.76. Unleaded gasoline
(
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PowerRating) also gained
.0193 to .7760. 

Natural gas had another wild day. The January contract
(
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PowerRating) shot nearly 13% higher in response to forecasts for more cold
weather in the center and northeastern parts of the country. The NY Mercantile
exchange recently increased the margin in natural gas futures. The higher margin
has forced some players to exit the market or to scale back the number of
contracts traded. As a result, thinner trading is exacerbating the volatility in
the commodity. The
January contract
(
NGF1 |
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PowerRating) pulled back to fill the gap and closed up .131 at
8.527, a gain of 1.56%. 

March wheat
(
WH1 |
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PowerRating) also reversed off a Turtle Soup Plus One Buy
signal for a gain of 3 1/2 to 268 3/4.
January soybeans
(
SF1 |
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PowerRating) fell back after poking a 20-day high, netting 2
1/2 to 509 3/4. Soymeal
(
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PowerRating) closed at a contract high, but still within
a flag pattern. A larger-than-normal move is expected in this contract due to
its
6/100 Low Volatility
List. The bias is to the upside.