GG now spends rainy days trading equities and currencies. He likes to use a combination of technical analysis and news flow to make trading decisions.
FOMC Meeting
Just thought I drop in a few words on the Fed’s next rate setting meeting, the results of which are due at 1915 BST on Wednesday.
Most commentators are now expecting a cut of 0.25% although there is an outside chance of no change. However the rhetoric that accompanies the decision will be more important in shaping the near-term direction of equity, bond and FX markets.
The key view is whether the Fed signals that rate cuts are on hold perhaps for an extended period, as they wait to see what the effect of a cumulative 300 basis points (3.00%) of easing since September last year has on inflation and on the wider economy.
In anticipation that this might be the last rate cut at least for a while, the dollar has started to rally against a number of global currencies, including the Euro (EUR/USD) and the Swiss franc (USD/CHF).
Signals that the Fed is more concerned about inflation and that this rate cut might be the last for a while have come in a number of recent speeches from Fed board members, designed like the ‘well sourced Sunday business story’ as a way of managing market expectations.
That isn’t to say that the US economy is past the worst. Far from it, there are key data releases over the rest of the week including the all important Non-Farm Payrolls employment data on Friday that are likely to show that things are a long way from getting better-at least for now on Main Street!
I’ll be keeping my finger on the USD/CHF button on Wednesday evening, but I’m going to read the text of the statement first-rather than dealing on the first headline that flicks across the screen!
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April 30th, 2008 at 1:04 pm
Just had some US data out which on the face of it, looks OK; though GDP data is backward looking it suggests no recession (at least not yet!) in the US.
The caveat is that much of the economy’s output went into warehouses as stock build and onto ships, rather than was consumed on Main St. Consumer spending at 1.0% was the weakest since the last recession in 2001.
So inventories build and the exporters are OK, but with a (temporarily?) resurgent US $, how long can this continue to keep the economy afloat?
The ADP employment data was also positive at +10k jobs created with a small revision up for last month too-which may have analysts tweaking their numbers a little ahead of Non Farm Payrolls data on Friday. More on this later!
Unlikely that the Fed can definitively say ‘No more rate cuts’ tonight just in case there are some shocking bits of data down the track, but I’m sure they will reiterate the line on concerns over inflation.
April 30th, 2008 at 8:11 pm
Interesting reaction to the Fed, bad for equities and the dollar? You can’t please all of the people……..
Seems that at the moment the market thinks the Fed is on pause, but for how long? The fx markets seem to think it may not be that long as they have taken the buck lower, whilst equities took more notice about the concerns about inflation that were voiced-perhaps signalling no further boost to the equity market short-term via additional rate cuts.
I guess something for everyone in the Minutes, votes were 8-2 in favour of a 0.25% cut to 2.0%, with 2 voting for no change. Fed withdraw comments on downside risk to economy, reinforce the view that inflation a concern.
No doubt each individual word of the FOMC text will be scrutinised for inferences for the next few days and Greg Ip (the ‘renowned Fed-watcher’ at the Wall Street Journal) may get a nod and a wink as to how the FOMC wanted the market to interpret the minutes-or is it nothing more than a case of ‘better to travel’?
My own view is that we may be on hold for a while-unless there is an absolute shocker or a recurring theme that shows up in future data releases. Conventional wisdom has it that it usually takes 6-9 months for the benefit of rate cuts to show up in economic data, and with 3.25% now lopped off since September 2007, it is probably right to see what if any benefit is in the pipelin. Tax rebates though small, have just started to hit accounts this week-which may also give the economy a temporary fillip.
The other view is that rate cuts alone are not going to solve this credit crisis-other liquidity measures might still be necessary.
Fed Watchers amongst you, keep’em peeled-and let us have your views here!
May 1st, 2008 at 8:27 am
So when it comes to the effect on monetary policy, are interest rate changes absolute or relative?
In other words, does a .25% cut from 2.25% now mean the same as a .5% cut from 4.5% a few weeks ago, given that it is the same change relative to the rate being cut. Or is it just the absolute number that matters and this latest cut is half a .5% cut regardless of the rate being cut?
Seems to me that it should be relative, so this cut does not signal a reduction in the loosening of monetary policy — and inflation remains the elephant in the room that the Fed keeps ignoring. So I have’t sold my gold yet, despite it breaching the 30-week MA this morning, which I may regret short term but not (I hope!) long term.
May 1st, 2008 at 8:56 am
Morning ken
Interesting thought you raise-and being a bear of little brain I’ll have to defer to Mr. FT, but I think I’d favour your relative view.
However, it seems that bond markets are taking a different view to the one I expressed above; price action today suggests they at least think more cuts are coming (as does the Lex column-and who am I to argue with such an august journal!)
Conflicting opinions perhaps, as the Dollar index has now recovered most of the Fed inspired drop-most of it against the Euro or is that somebody just taking advantage of a thin Euro market as they are all off having a beano?
If there are diverging views could make for some interesting trading before the next FOMC meeting- but I think they are still basically data dependent. Perhaps on a bit of reflection I suspect the market will try and bounce the Fed into yet another cut. Managed it under Greenspan-and look where we have ended up!
Whether the FOMC capitulate this time round will be the interesting call.
On to ISM and payrolls!