Reply #7: dollar watch [View All]

[UpInArms]

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Last trade 75.378 Change -0.408 (-0.54%)

US Fed: Futures Price In A 96% Chance Of A Rate Cut - Are The Markets Wrong?

http://www.dailyfx.com/story/topheadline/US_Fed__Futures_Price_In_1195557763232.html

Many FOMC members have made a point of signaling no intention of cutting rates again in the near-term, as record high oil prices significantly raise inflation risks in the economy. However, the markets appear to be trying to force the bank’s hand as federal fund futures currently price in a 96 percent chance of a 25bp rate cut in December. With less than a month until Bernanke & Co. convene again, they are working the press overtime to convince investors that they don’t have to make policy more accommodative. Will the markets buy it and cut back speculation of a rate cut? Furthermore, can it revive the beleaguered US dollar? After Tuesday’s release of the October FOMC minutes, we may finally get our answer:

Ben Bernanke, Federal Reserve Chairman (Voting Member)

“The goal is for Fed officials to provide the public with greater and more timely insight into the Federal Open Market Committee's views of the economic outlook and the risks to that outlook.” – November 14, 2007

Randall Kroszner, Federal Reserve Governor (Voting Member)

“In sum, in September and again in October, I believed that achieving the FOMC's statutory mandate to promote price stability and maximum employment would best be accomplished by lowering the target federal funds rate. With those actions, however, the downside risks to economic growth now appear to be roughly balanced by the upside risks to inflation. I would add that the limited data and information received since the October FOMC meeting have not changed my thinking in this regard.” – November 16, 2007

Richard Fisher, Federal Reserve Bank of Dallas President (Alternate Voting Member)

“Too many people think we are preoccupied with economic growth at the expense of doing our job on the inflation rate. We are not. There is as yet no indicator that the economy is falling off the table.” – November 14, 2007

“I find that there is greater symmetry of risk between growth and inflation than is commonly surmised. Our concern about inflation at the Dallas Fed stems from two more pervasive sources -- food and energy, where we foresee a risk of a more pernicious pass-through effect than we saw in the recent price increases of underlying commodities…A spread of the current magnitude between food price inflation and the core index occurred on several occasions between 1957 and 1980. But we have not seen it in a quarter century.” – November 14, 2007

Thomas Hoenig, Federal Reserve Bank of Kansas City President (Voting Member)

“I am not at all opposed to necessary actions either way for the future…Right now I am in a wait-and-see mode, at least until the December meeting…If the data comes forward in a weaker form…then I think it would require an action on the Federal Reserve to offset that. On the other hand, if these strong factors carry forward, and they have in past financial crisis, we have to be mindful of that as well.” – November 15, 2007

“While we in no way want the economy to slip into a slower-growth environment, we also want to be careful that we follow the dual mandate and watch our inflation numbers as well…Inflation doesn't increase in big jumps. It increases in little steps…Food and energy are increasing and they are an important part of every consumer's budget, and I think that's a factor that we can't lose sight of.” – November 15, 2007

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Dow Drops 200 Points, Dollar Strengthens and Carry Trades Resume Weakness

http://www.dailyfx.com/story/bio1/Dow_Drops_200_Points__Dollar_1195512794972.html

The US dollar is up across the board but that strength is more of a reflection of rising risk aversion than a rosier outlook for the US economy. Stocks are down over 200 points, bond yields have plummeted, carry trades resumed their weakness and gold prices are off one percent. This cohesive price action reflects a market that believes the Federal Reserve will lower interest rates by another 25bp next month. In fact, rate cut expectations have increased to 100 percent today from 90 percent on Friday. Investors continue to be worried about the housing market and the banking sector after Goldman Sachs downgraded Citigroup stock to sell. The 2 year US swap spread also jumped to levels last seen in 1989, leading us to wonder if the latest rise in risk aversion will be as bad the one in August. The rise in the swap spread indicates that concerns about credit and funding have returned. Although we still have over 3 weeks before the next FOMC meeting, if rate cut expectations stay at present levels, the Federal Reserve may have no choice but to bow to market pressures by lowering interest rates once again. They may actually need to do so if the holiday shopping season proves to be as tough as some analysts expect. The NAHB housing market index remained unchanged for the month of November which is the first time in 9 months that the index did not deteriorate. It is still premature to assume that the housing market has bottomed. Housing starts and building permits are due for release tomorrow, unless we have a big rebound, the sector remains vulnerable to further losses. Meanwhile we are also expecting the minutes from the October 31st monetary policy meeting. It will be interesting to see if the Fed’s decision to lower rates was a reluctant one. Given Bernanke’s greater concern about growth than inflation last week, hawkish minutes may actually not be market moving.

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