FYI | Sep 16 2007
By Greg Peel
Enough has been said about the Fed rate decision. On Tuesday the FOMC will either leave rates unchanged (not expected), cut by 25bps (most expected), cut by 50bps (less expected) or cut by even more (not expected). The immediate direction of the stock market will be determined by this decision, but it won’t just be about the cut alone.
The Fed could also choose from a number of other options, such as a further cut in the discount rate. To speculate is to risk going quite mad. Just as important as the numbers will be the accompanying statement, from which traders will attempt to garner clues of what might happen down the track. For example, if the Fed cuts by only 25bps the market may well be disappointed, but it will be more disappointed if inflationary pressures are again a focus in the rhetoric (suggesting 25 might be all you get). Alternatively, if the Fed only cuts by 25 but hints at further cuts to come, then the market may well be happy.
There are some important data being released in the US next week, but the rate decision is the overriding factor. It has most likely already been made. Nevertheless, Monday sees the release of the Empire manufacturing index for September (a timely number), and Tuesday the August PPI and NAHB housing index for September (also timely). Tuesday also sees July TIC flows, which indicate whether the world is buying or selling US assets. Wednesday brings the August CPI, which will be of particular significance if the Fed only cuts by 25bps. Wednesday also sees August housing starts and building permits. Thursday wraps up with the August leading indicators and the Philadelphia Fed September report.
While the rate decision may prove a source of volatility, so too may the third quarter earnings reports released this week by four major US investment houses.
Bond specialist Lehman Bros reports on Tuesday. CNNMoney notes consensus is for an EPS of US$1.47 against a second quarter actual of US$1.57. Morgan Stanley comes in on Wednesday (1.53/1.75). On Thursday, investment bank bellwether and the most diversified business, Goldman Sachs, reveals all (4.35/3.26) along with the brokerage that started it all in July – Bear Stearns (1.78/3.02).
Just to add more excitement to a possible rollercoaster of a week, Friday in the US is “quadruple witching”. This occurs when stock options, stock futures, stock index futures, and stock index futures options all expire on the same day. This has traditionally proven a potential source of excessive volatility as position holders either try to push the market or rush to cover short positions.
Australia’s week will be lacking such a level of activity, other than that which spills over as a result of Wall Street’s responses. The main focus will be on two RBA speeches – one from Governor Stevens to the Asia Society on Tuesday, ahead of the Fed decision, and one from Deputy Governor Battellino on Wednesday, after the decision is known. Thursday brings the RBA bulletin. Markets in Australia have begun to price in less of a chance of another RBA rate hike in 2007 due to the likely easing to come from the US. However, there is no denying most recent economic indicators would otherwise suggest a tightening is needed in Australia.
On the data front, Australia will only learn HIA new home sales for August on Thursday, and August new vehicle sales on Friday.
Elsewhere in the world, Japan also makes its rate decision on Wednesday, but given the recent release of a negative second quarter GDP number, and current market conditions, no none expects the BoJ to hike. New Zealand releases its second quarter current account on Thursday.
One other release of interest this week will be the release of Coles’ (CGJ) FY07 earnings on Wednesday.
Have fun.
