The Market Handicaps The Fed
Federal fund futures contracts are pricing in a high
likelihood of a .50 shave in the fed funds target rage, just one day 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 downtrodden economy in shock, driving the rate down to 2%, a level
not seen in nearly 40 years.Â
But the December 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. 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 followed
through, 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.Â
But as pointed out in Mid-day Futures Alerts and in
Futures Recaps in recent weeks, aggressive Fed action that takes interest
rates below 2.50% poses risks. Inflation rears its head once the short-term
rate drops below the rate of inflation and inflation is currently about
2.7%.Â
T-bonds tanked in the days after the Fed’s
intersession cut. The Fed took aggressive action to provide financial
markets liquidity once markets re-opened on Monday, September 17,Â
following the 911 terrorists attacks. Inflation erodes the value of
long-dated fixed income products.Â
But for today, debt futures are still responding to
recent inertia from rebound rallies that have placed 10-year notes
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on the Momentum-5
List and T-bonds
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New 10-Day Highs List. T-bonds are making good on their Off The Blocks
long setups; 10-years got chopped out of the trade. Rate action that takes
the fed funds futures below 2.50% should be negative for T-bonds.
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 is off .0053 at .8362.Â
Also from the Momentum-5
List, the
British pound
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spike high incurred on the day of the 911 attack. Such spikes often act as
resistance (or support, if a low was made) on subsequent retests.