FYI | Oct 27 2007
By Greg Peel
Last week in the US stock market saw several attempts at selling which failed at the final hurdle due to bulls expecting an all powerful rate cut from the Fed this week. The expectation of a 25 point cut is now “baked in” to market expectations, leaving a “significant minority” who believe another 50 point cut will be forthcoming. The Fed funds futures market is the direct indicator of predictions.
What this means is that if the Fed delivers only a 25 point cut on Wednesday night (Australian time) the most likely movement in equity markets will be down, while a 50 point cut should spark even further strength, despite the strength already exhibited. But that would be to use logic, and logical this market necessarily is not.
Continuing on the theme, nevertheless, a 25 point cut should also cause the US dollar to rally, gold to see profit-taking, and the Aussie dollar to fall back. A fifty point cut would likely achieve the reverse.
But one must also consider that the possible outcomes are not actually limited to two. Some believe the Fed acted drastically last time (50 points) in anticipation of exactly that which is now occurring – poor housing data, poor financial sector earnings reports, and dramatic mark-downs in the value of asset-backed securities. On that basis, it is still possible that the Fed will not cut at all, which would be one helluva shock for the market. The effects of monetary policy changes do not flow through to markets in the space of one month, or indeed the space of one quarter, so perhaps the Fed will still want to wait and see what the previous 50 point cut might affect. But on the flipside, history shows that when the Fed changes direction in monetary policy, it rarely makes only the one adjustment.
But we could talk about this all day. While the Fed decision will dominate markets across the globe this week, there is also a good deal of US economic data to digest.
Tuesday sees October consumer confidence. Wednesday brings the rate decision, along with third quarter GDP, September construction spending, the Chicago purchasing managers’ index for October, and the ADP October employment data. On Thursday we have September personal spending and core PCE deflator, the ISM manufacturing index for October, and October vehicle sales. Friday sees September factory orders, along with the all important October payrolls data.
It could be quite a week.
In Australia, we learn the NAB business confidence measure for September on Tuesday, September building approvals and RBA credit aggregates on Wednesday, and the September trade balance and retail sales on Thursday. Japan makes its monthly rate decision (expected to be unchanged) on Wednesday.
On the local market front, St George Bank ((SGB)) releases its full year result on Wednesday, there is another spate of resource company third quarter production reports, and an ongoing festival of AGMs. For all the details refer to the FNArena calendar.
