Tue 11 Dec 2007
FOMC Rate Decision
Posted by ray under Miscellaneous
There are two services I subscribe to that I find invaluable for the assessment of fundamental data:
- Shadow Stats: www.shadowstats.com
- ECRI Light: www.businesscycle.com
Shadow Stats provides an alternative data source to official US statistics and ECRI Light provides reliable leading indicators on the state of the US economic growth and inflation. The two together provide data on whether or not my ideas about ‘long-term’ perspective are being reflected in the economy.
I tend to rely more on the ECRI report than Shadow Stats and will lean to the former if there is a conflict. But right now they both agree: the US economy sucks. Despite the rosy picture provided by Non-Farm payrolls, the latest Shadow Stats demonstrates why the official figures are an illusion.
The ECRI published Friday Dec 7 2007 for the week ending Nov 30, shows US economic growth at a 5-year low and inflation down a tad. The ECRI indicators have about a 3-months lead time. So, I’ll know if my idea - that the massive increase in the money supply in August through to November 2007 will lead to a rise in inflation despite the weak economy - will be correct about 3-months before there is pressure on the FEDS to raise rates. But that’s for the future.
For today, the true state of the economy is the focus. Tuesday 2:00 PM EST, the FEDS will announce their decision. The worry for me is I am in the majority camp - I think there is little chance there will not be a .25 cut in the Fed Fund Rate and in the Discount Rate. But given the state of the economy, the sub-prime liquidity crunch, and Bernanke’s ideas of the causes of the 1929 Depression, I rate the probability of a hike above .25 around 67%.
If it were just the matter of the economy, I’d rate the probability much higher. However in the near term, the FEDS have the US$ to worry about. I would hesitate a guess that despite the jaw-boning, they would not be averse to a sliding US$ as a measure against recession. However, what they don’t want to see is a US$ rout. And that is what they are likely to get if they decreased rates in the Fed Fund Rate and the Discount rate by 0.50. In addition, the decrease in rates in the Fed Fund Rate has done little to assuage the liquidity problem.
So, for all these reasons, I rate the probability of about 67% for a decrease of .50 in the Discount Rate and a .25 cut in the Fed Fund Rate. Such a move at least provides some chance the US$ decline will not turn into a bearish stampede.
What do I see happening if such an eventuality occurs? Well, I’d expect the ES to rally strongly and take out the current highs before year-end. We’re only 70 points or so away, so that’s not hard to imagine.
I’d expect the US$ to drop strongly over the next week but do expect to see some buying come in. December is seasonally a strong month for the US$ and so far it has held up well.
As always, whatever your position (long or short), in whatever instrument (Gold, Interest Rates, Stocks and Stock Indices etc), I recommend you create some worse case scenarios in case the FEDS do something unexpected and/or the market reacts in a way contrary to your expectations. Preparation is my key to preventing the ‘rat brain’ seizing control and thus turning a well-planned loss into a catastrophic one.
December 12th, 2007 at 12:52 am
Ray,
The FED fulfilled investors’ expectations for an additional interest rate cut of 25bp , just as I expected which is not contrarian, as I tend to be.
As a 25-basis point reduction had already been priced into the market during the recent rally, the disappointment that a more aggressive rate cut of 50 basis points on the discount rate did not materialize, (which you did hope) triggered a large wave of profit taking.
EG, The Dow intraday range from high to low amounted to a massive more than 340 points.
The better trade surrounding such events is to fade, or trade against, an extreme reaction in either direction.
When we get a weak close and a gap down open the next day, I can look to buy, applying your usual signals for zone, set-up and entry/stop.
December 12th, 2007 at 1:00 am
Hi Ana
Thanks. Yes I was wrong on the prob assessment on the FOMC decision. I’ll say more on tonight’s post. I hope you made tons $!
December 12th, 2007 at 1:09 am
We as mortals can only guess what Bernanke will say each time, Ray.
Added to his rate announcment, is his wild card ie the Fed statement, which could be more aggressively worded than before, which is equally news-breaking.
December 23rd, 2007 at 4:13 pm
Relating to spikes on economic news,here is a partial reproduction from TraderFeed:
Feb 18 2007
http://traderfeed.blogspot.com/2007_02_01_archive.html
From Brett: The best practice takeaway from AnaTrader’s post is that, in the Forex market, it is important to not overreact to false price spikes that may appear. It sounds as though this is just what the traders are trying to cause in the first place.
A different kind of spike is caused by “fat finger” episodes in which a trader might mistakenly buy 10,000 contracts at the market rather than 1000. The resulting purchase takes out quite a few price levels and can lead to further short covering before anyone figures out that this was simply a mistake. A trader who might be working an order to sell above the market would find themselves short and immediately down a couple of points or so on their position. This is not common, but it is an occupational hazard of working orders in the book. Another occupational hazard is working orders in the book prior to the release of an economic report. If the report does not fall within expectations, a spike of price movement created by automated trades can fill you at very bad prices. Unlike the situations mentioned by AnaTrader, these trades will not be “outed”. Rather, you’ll be out some capital! My own practice is not to work orders far from the market. If I want in at a good price, I’ll try to buy at the current bid or sell at the current offer. But I’m not a scalper and, if I’m telling myself I have to be first in the order queue to get filled and make my trade work out, that suggests my trade idea is not so robust.
Bottom line: You have to know *your* market. The meaning of a rogue price spike in one market could be very different from that in another
More at TraderFeed.