The idea of recession in the worlds largest economy has hit all markets and added more to already elevated volatility; the feds emergency cut was not aimless and did had its alleged allegations to back up that decision, and for that IÃ¢â‚¬â„¢m going to list the two top priorities on their list.
The first reason starts with the equity rout, which was fueled by recession fears in the US and the extended effect of the housing market slump and the mortgage market collapse. The feds needed to intervene in hope to change the course of markets before their markets join the world after the holiday and for that the decision came before the bell rang!
The second was the rapid deterioration of growth levels that was evident to the feds that at the provided rate they are to see more than just Ã¢â‚¬Å“appreciating downside risks to growthÃ¢â‚¬Â their economy will be in no time in recession, one that will take time to get out of.
The optimism in the market is further magnified as US fundamentals have not yet reflected the stance of US officials nor justifies marketsÃ¢â‚¬â„¢ position. Monthly readings from various sectors actually provide the solid proof especially if we look at the FedÃ¢â‚¬â„¢s cherished labor sector which has been weakening noticeably in the past few months! Today the ADP will be the fist clue for us to FridayÃ¢â‚¬â„¢s labor data as they expect private sector employment to stay at steady at DecemberÃ¢â‚¬â„¢s rate of 40 thousand. That was when Nonfarm payrolls market sluggish 18 thousand!
Employment is a focal essence for the US economy as it is the driver to consumption which Mr. Bernanke sought it to be the economyÃ¢â‚¬â„¢s savior as it added nearly above 2.0% to the GDP in the third quarter of 2007! The GDP which ended those three months at 4.9% is today expected to have grown on a much slower pace in the last three months of 07 with 1.2%; where the personal consumption is surprisingly projected with steady growth form the previous quarter at 2.8% which makes no much sense to be fair!
Economic growth will slow further in the first half of 08 and that is true, for data so far confirm that heading; yet we are now judging the major turmoil months were employment slowed and layoffs inclined, losses where reported massively, while sales slowed; and the major contributor remains the export market with their depreciating currency, and was clear in yesterdayÃ¢â‚¬â„¢s durable orders surging way above expectations, while the major absorber to growth remains the HOUSING MARKET that shed about 1% off growth in the third quarter and now clearly the slump has deepened further which added to the feds predicament!
For those reasons the feds are on the role in lowering rates and adding liquidity in the market by the TAFs and now the Bush administration is about to add a hefty fiscal stimulus package to support the economy! Seemingly the fed are no near worrying about inflation at this stage despite higher imported inflation and surging energy prices proving that consumption is really sluggish in the US at this stage! The advanced Core PCE reading on the quarter is expected to have risen to 2.4% from 2.0% in the 3rd quarter yet as we said seems that is not even near the feds focus.
The feds emergency call was provided for the main reasons above and moreover it was meant to provide them with more space to cut further if they and markets say that the 75 bp were not enough to save the economy from deep recession. The decision today is expected to show the feds taking rates down to 3.00% and another 50 by the Board of Governors on the Discount Rate to 3.50%.
The Ã¢â‚¬Å“substantial easingÃ¢â‚¬Â is now no longer a phrase it is actually true; traders locked 70% chance for that 0.50% while the left minority goes for a 25 bp cut! Mr. Brnanke and his squad at this stage cannot BUT deliver markets with what the need as they canÃ¢â‚¬â„¢t gamble the loss of confidence again for now if they thought a quarter point cut will do it that is seriously to disappoint markets, as now the 50 is locked in the market.
Surely there is to be a statement accompanying the decision today, and the rhetoric is to be altered, as they now have learned what they referred to as Ã¢â‚¬Å“ongoing housing correctionÃ¢â‚¬Â did not fool much! They are expected to show a stronger tone on growth Ã¢â‚¬Å“appreciable risksÃ¢â‚¬Â while they are now to point to inflation that they did in their emergency cut in hopes to provide the markets with the perception that easing days have come to an end so that they donÃ¢â‚¬â„¢t expect much more form the feds at this stage.
The market will be steady until the US session and the movement will be delayed until we have that decision in hand; so be careful letters even now count, markets have been waiting long and any disappointment of different perception to feds action will signal a strong wave in markets! Be careful and stay tuned as the fun is about to beginÃ¢â‚¬Â¦