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Investors Need More Than a Rate Cut From the Fed
Posted by Louis Navellier on 10/28/08 9:12 am
Last Friday, Britain announced that it slipped into a recession in the third quarter. And on Thursday this week, the U.S. will likely announce that it is headed for recession, too, when the government releases its preliminary estimate for third-quarter GDP. Economists are predicting that the U.S. economy contracted by 0.5% in Q3. However, before the GDP report gets released, the Federal Open Market Committee will most likely cut interest rates on Wednesday. The futures market is predicting a 100% chance the Fed will cut the federal funds rate by 0.5% to 1%, primarily because Fed Chairman Ben Bernanke has signaled there will be an additional rate cut. Furthermore, market rates, based on the 3-month Treasury bill, remain below 1% and the Fed rarely fights market rates.
As a result, the GDP report might not have much effect on the market since a -0.5% reading is likely already priced in. But if the reading is worse than expected, we could see more weakness in stocks. That’s why we need some encouraging words from the Fed to go with a rate cut on Wednesday.
The Fed’s statement will be thoroughly scrutinized and it will help set the tone for the stock market in the days ahead. If the Fed shows fear, the stock market will likely give back much of today’s gains, especially if the GDP report is worse than expected. If the Fed gives us a silver lining, the stock market will likely extend today’s rally.
Investors need a spark that will release the trillions of dollars sitting in cash on the sidelines and stop the massive erosion in stock prices. Hopefully the Fed will step up to the plate tomorrow and cut interest rates by at least 0.50% and say something that gives investors hope.
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Fed Report Shows Economy Slowing
Posted by Patrick O'Connor on 9/3/08 12:52 pm
Nearly all 12 Fed districts across the nation reported signs of a slowing economy in the Beige Book report.
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Falling Oil Prices and Less Hawkish Fed Ignite Rally
Posted by Patrick O'Connor on 8/5/08 12:54 pm
Oil prices fell almost another $3 per barrel today, down to $118.55, and the Fed kept interest rates unchanged at the FOMC meeting, as expected. However, the market was surprised to learn Fed members voted 10-1 to keep rates steady. Most thought the voting would be closer after some Fed members publically voiced their concerns about inflation. For example, Philadelphia Fed President Plosser had been particularly hawkish in recent speeches, and he voted in favor of keeping rates steady. Only Dallas Fed President Fisher voted for a rate hike, which was no surprise. He has consistently voted for higher rates. Read More.
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The Fed Will Not Raise Interest Rates Tomorrow
Posted by Louis Navellier on 8/4/08 11:35 am
The fed funds futures contract is pricing about a 30% chance the Fed will raise key interest rates tomorrow, which I agree with, since market rates, based on the 3-month Treasury bill, remain significantly below the current 2% federal funds rate. Despite outspoken “hawks” on the FOMC, such as Philadelphia Fed President Richard Plosser, I expect that Fed Chairman Ben Bernanke and the other “doves” on the FOMC will prevail and hold key interest rates steady, especially in the wake of last week’s awful economic news.
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Beige Book Underscores Dilemma for Fed Officials
Posted by Louis Navellier on 7/23/08 11:42 am
The Fed’s Beige Book report today is a bad sign and indicative that the Fed may not raise key interest rates, despite the fact that the internal disagreement between Fed officials is becoming more public.
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Stronger Dollar Causes Sell Off in Commodities
Posted by Patrick O'Connor on 7/23/08 5:51 am
The threat of higher interest rates from a Federal Reserve president and stronger-dollar rhetoric from Treasury Secretary Henry Paulson is extending a slide in commodity prices today. Oil prices are down about 15% from their all time highs, wheat is down more than 40% since February, and the UBS Bloomberg Constant Maturity Commodity Index, which tracks 26 raw materials, is down more than 7% for the month. Read More.
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Expectations for Higher Interest Rates Have Changed Dramatically
Posted by Patrick O'Connor on 6/17/08 12:51 pm
Just one week ago the fed funds futures contract was pricing in a zero percent probability for a quarter point interest rate hike at the next FOMC meeting on August 5, but then the probability recently soared to 65%, and then to 91% on Monday. Read More.
The big reasons for the sudden change in interest rate expectations were Federal Reserve Chairman Ben Bernanke recently surprised the world by saying he supports a stronger dollar, several central banks appear to be working in concert to fight inflation, and Bernanke voiced concerns about headline inflation seeping into core inflation (prices minus food and energy).
Fortunately for the last item, today’s Producer Price Index revealed that it still appears that higher food and energy costs are not leaking into the core at the wholesale level. The PPI’s May headline result came in at a staggering 1.4%, but the core was just 0.2%, thanks largely to a 1% drop in car prices.
As a result of the PPI, the probability rate dropped to 57%. But keep in mind that the futures contract still expects a 69% chance for the fed funds rate to go up by three-quarters of a percent by November. Read More.
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Fed’s Beige Book Confirms Inflation
Posted by Louis Navellier on 6/11/08 1:47 pm
The Federal Reserve’s Beige Book noted that “economic activity remained generally weak in late-April and May,” but there was little indication that the economy had deteriorated further. However, the report did show increased inflation risk. See The Wall Street Journal’s Beige Book Interactive Graphic.
As a result, this report confirms that interest rates likely hit their lows recently.
Read more interest rate blog posts.
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Have Global Interest Rates Bottomed?
Posted by Patrick O'Connor on 6/10/08 1:41 pm
Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson have been taking the dollar’s value very seriously lately. They’re trying to stop its slide against other currencies in order to limit the commodity inflation that is threatening the U.S. and global economies.
Today, Bernanke indicated that the economy is looking better all of a sudden.
“The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so,” said the Fed chairman in a speech at a Boston Fed conference.
As a result, the dollar had another big day. In fact, it had its biggest two-day rally against the euro since 2005. Treasury yields have been surging higher as well. The 2-yr Treasury’s yield spiked 0.365% yesterday, it’s biggest one-day bounce in 12 years, and it climbed another 0.21% today.
Other central banks are taking inflation seriously, too. In fact, there appears to be a concerted effort underway to stop cutting rates and possibly begin raising them.
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2-yr U.S. Treasury Prices Fell the Most in 12 Years Today
Posted by Patrick O'Connor on 6/9/08 12:17 pm
2-year U.S. Treasuries took a beating today when prices collapsed and yields shot up 0.365%, the biggest one-day jump in 12 years.
2-yr notes are extremely sensitive to the Federal Reserve’s stance on interest-rate policy, and a speech today from New York Federal Reserve President Timothy Geithner at the Economic Club of New York spooked the market when he said interest rates around the globe might have to increase this year to temper inflation pressures.
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