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US economic data has not fared well as we enter 2008, as last week’s dismal non-farm payrolls reading of 18K and jump in the unemployment rate to a two-year high of 5.00 percent points toward a gloomy scenario: a consumer driven recession. Indeed, the US housing market is still in shambles, oil has touched a record of $100/bbl, and equity markets remain vulnerable.
As the Federal Government discusses possible options for “economic stimulus” packages in this all-important election year, there is little doubt the FOMC will move to make monetary policy more accommodative this month. The question is, will it be a 25 or 50bp cut? Fed fund futures are betting on a 68 percent chance of the latter, but if next week’s CPI figures surge – suggesting inflation pressures are steadily building – the markets may move back to pricing in a 25bp cut. Either way, upcoming releases could spark major volatility for the US Dollar, especially as we near the big rate announcement on January 30.
Yield Spread Analysis 01/02 – 01/08
A spike in risk aversion and sharp declines in the equity markets sent government bonds surging amidst flight-to-safety, subsequently sending yields tumbling. The greatest shift was seen in the US, with 10-year Treasury yields plunging more than 16bp as recession risks mount. Indeed, US NFPs proved to be disappointing while the unemployment rate ticked up to a two-year high of 5.0 percent, and as a result, fed fund futures have moved to price in at least a 25bp rate cut at the end of the month and a 68 percent chance of 50bp cut.
US economic data released over the course ahead of the January 30th meeting may shake up these estimates, as Retail Sales and CPI will likely prove to be highly market moving next week. Looking ahead, this week’s US data may do little to spark major volatility, but rate decisions on Thursday by the Bank of England and the European Central Bank will be watched carefully, though neither is expected to adjust interest rates. Meanwhile, the primary driver of fixed income market price action will likely remain risk aversion, so traders should keep an eye not only on economic data, but the status of the equity markets as well.
US Fed: It’s Not A Matter of If They Will Cut, But By How Much
As the Federal Government discusses possible options for “economic stimulus” packages in this all-important election year, there is little doubt the FOMC will move to make monetary policy more accommodative this month. The question is, will it be a 25 or 50bp cut? Fed fund futures are betting on a 68 percent chance of the latter, but if next week’s CPI figures surge – suggesting inflation pressures are steadily building – the markets may move back to pricing in a 25bp cut. Either way, upcoming releases could spark major volatility for the US Dollar, especially as we near the big rate announcement on January 30.
Yield Spread Analysis 01/02 – 01/08
A spike in risk aversion and sharp declines in the equity markets sent government bonds surging amidst flight-to-safety, subsequently sending yields tumbling. The greatest shift was seen in the US, with 10-year Treasury yields plunging more than 16bp as recession risks mount. Indeed, US NFPs proved to be disappointing while the unemployment rate ticked up to a two-year high of 5.0 percent, and as a result, fed fund futures have moved to price in at least a 25bp rate cut at the end of the month and a 68 percent chance of 50bp cut.
US economic data released over the course ahead of the January 30th meeting may shake up these estimates, as Retail Sales and CPI will likely prove to be highly market moving next week. Looking ahead, this week’s US data may do little to spark major volatility, but rate decisions on Thursday by the Bank of England and the European Central Bank will be watched carefully, though neither is expected to adjust interest rates. Meanwhile, the primary driver of fixed income market price action will likely remain risk aversion, so traders should keep an eye not only on economic data, but the status of the equity markets as well.
US Fed: It’s Not A Matter of If They Will Cut, But By How Much
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