FYI | Jan 29 2008
By Greg Peel
It’s a busy week for economic data in the US, culminating in the January jobs data on Friday, but dominating this week will the rates decision by the Fed on Wednesday.
The Fed made an emergency cut of 75 basis points to 3.5% last week, but since then two things have occurred – the market has bounced back from the brink, and it has been revealed that the Fed may have been forced to act in somewhat false circumstances last Tuesday. Last Tuesday the Dow was set to open down about 500 points following a sharp sell-off in Europe on the Monday that flowed into Asia and the rest of the world. We now know that Societe Generale was selling stock futures on Monday in an attempt to close out its US$8bn in losses. That explains why Monday’s weakness seem to have come simply out of the blue.
The Fed denies the 75 point cut was a panic reaction to a potential stock market calamity, although many are questioning the denial. What is now important is just what the Fed will do at its regularly scheduled rates meeting starting tonight. Originally the market had priced in a probability of another 75 point cut as being a better than even chance. With a bit of inflation concern moving into bond markets, that probability has been cut back to 50 points. The market appears to be happy with 50 points, but given the Fed may have been somewhat duped into the emergency cut (it represented only one seller and not a world collapse), perhaps it might be cautious about overextending the stimulus. Bear in mind also that the Bush Administration is also on the case, providing tax relief and opening up more Americans to cheap mortgage finance. The bond insurance market is also set to be bailed out. Does the US economy need another big cut?
If the market doesn’t get 50 points, it may be a catalyst to retest the stock market lows – something both fundamental and technical traders are suggesting is probably needed before we can be truly entertaining the idea of a return to bullishness.
Tonight in the US sees December durable goods orders and January consumer confidence. The fourth quarter GDP is announced on Wednesday along with the fourth quarter PCE deflator – a popular measure of inflation. The Fed announces its decision.
Thursday brings December personal income and spending and the Chicago purchasing managers’ index for January. Friday is then the big one, with the January employment data being released along with December construction spending, the January ISM manufacturing index, and the Michigan University measure of consumer confidence for January. It’s a big week for gauging whether the US has fallen into recession, although the Fed’s decision may be an overriding factor.
Today in Australia we learn the NAB monthly business survey for December. Wednesday is January skilled vacancies and Thursday sees December private sector credit and new home sales. Friday wraps up with the AiG-PMI manufacturing index for January.
Elsewhere, an important number will be the EU CPI for January. The ECB has not yet budged on rates, despite the actions of the Fed, because it fears inflation. Will its fears be justified? A low CPI might see the EU rate trimmed and the US dollar have a run.
On the local stock front, there is a further wealth of fourth quarter production reports coming out from resource companies this week, and we see the first trickle of the February result season. All information is available on FNArena’s calendar.
