FYI | Sep 19 2007
By Greg Peel
At 2.15pm New York time last night, the Fed announced a 50 basis point cut in the Fed funds target rate to 4.75%, and an accompanying 50 basis point cut in the discount rate – the rate at which banks can access emergency loans – to 5.25%. The NYSE was ecstatic. The move was about as much as anyone could have hoped for. Consensus had settled on only a 25 basis point cut.
At 2.14pm the Dow was up about 70 points. Within minutes it added another 150 points. Thereafter it just kept climbing, closing up 336 points or 2.5%. The broad market S&P 500 faired even better, gaining 2.9%. The Nasdaq chimed in with 2.7%. Volume leapt from 2.5 billion shares on Monday to 3.7 billion shares last night. Gainers outstripped losers by 10 to 1.
The big winners in the move were those sectors that had been previously trashed – consumer goods, house builders and financials. A combination of short-covering and relief buying saw the Dow post its biggest points gain since October 2002, and its biggest percentage gain since April 2003. This was the first Fed rate change in over a year, and the first rate cut since 2003.
The mood was positive early in the session. Lehman Bros was the first of the big brokerages to report its third quarter earnings, and before the bell it announced a 3% fall compared to the 6% fall expected. Immediately financial stocks were on the front foot, traders anticipating that subsequent earnings reports this week may also be better than expected.
Then the August PPI was released, and it showed wholesale prices fell 1.4% for the month. The core PPI (ex fuel and food) rose by a mere 0.2%. These numbers suggested the Fed had little to worry about with regard to inflation. The scene was set for at least some sort of rate cut.
By the end of the day Lehman Bros was up 10%, leading the way in a financial sector that posted some serious gains. Perhaps the most remarkable move of the day came from leading home builder Hovnanian, which only last week had successfully held a “fire sale” of over 1000 homes. Hovnanian’s shares rose 24%. Double digit gains were experienced elsewhere across the sector.
But if the PPI was suggesting a lack of inflation concern, the same could not be said for the US dollar. There were some who had suggested a 50 basis point cut might actually spark a rally in the dollar, as it would provide relief against a possible recession. It was not to be.
The US dollar managed only a rally against the yen, but then the yen has lately become less of a currency and more of a global risk indicator. A 50 point cut was a green light for the carry traders. The dollar leapt from around 115 against the yen to around 116, having only recently tested 112. The Aussie dollar responded with a full US2c rise, from around US$0.8330 to around US$0.8530.
But the US dollar fell solidly to a new low against the euro, at 1.3984. It also fell heavily against the pound, to 2.0134. The move against the pound was a sharp reversal of movements in the last few days which have seen the pound come under a lot of pressure due to the Northern Rock situation.
Gold has been anticipating this move, but it, too, surged once more to post a 27-year high. Spot rose US$6.00 to US$723.40/oz, while Comex December futures jumped to US$735.50/oz – the highest level for the active month since 1980. The oil price, which had already been exploring new territory ahead of the Fed decision, rose another US94c to US$81.51/bbl.
Base metal trading in London had closed prior to the Fed announcement, but news that nickel inventories fell for the first time in two weeks sent the metal up 4% higher in London and 7% higher in New York. This was the only move of any significance.
The SPI Overnight rose 140 points, or 2.2%.
So is that it? Are all our troubles now over?
While the jump in stock prices was not to be unexpected following this largely unexpected cut, not everyone on Wall Street is convinced. This was a drastic move – why? What does the Fed know? Has Bernanke risked a bail-out of financial markets at the expense of inflation? You could say opinions are running at 50/50.
More discussion of the implications later today.
