Weekly Market Recap and More Fed Ahead

by Jeffrey Friedman

The week of January 21 saw little economic data, but some big volatility on big news. The Federal Reserve offered up a surprise rate cut before the markets opened in the U.S. on Tuesday, January 22, 2008. Also, the latest data indicated that housing appears to still be searching for a bottom. Will the Fed offer up another rate cut this week?

Last week, the Fed unexpectedly cut the Fed funds target rate by a whopping 75 basis points and at an unscheduled emergency meeting, leaving the target rate at 3.50 percent. Since August, the Fed has cut the Fed funds target rate four times and by a cumulative 175 basis points. The Fed also lowered the discount rate by 75 basis points to 4 percent. The Fed’s regularly scheduled Federal Open Market Committee Meeting takes places Tuesday and Wednesday of this week.

The Fed is quickly running out of room to cut interest rates much further.  Should the markets get their wish that the Fed cuts the Fed funds target rate by 50 basis points more this week, then the real Fed funds rate will be somewhere between negative one-half percent and positive one-half percent, depending on your definition of inflation. While the Fed funds futures market is pricing in a 2-1/4 Fed funds rate by August, a realistic assessment suggests that is not likely. Hopefully, the Fed realizes that it is partly to blame for the housing bubble, as it was too loose with money after the 2001 recession, and will not repeat the same mistake this time while trying to avert a 2008 recession — which many see as being averted, but barely. Remember, rate cuts take a few months to work their way into the economy.

Taking a look at the S&P, the market faced a bit of profit-taking last week after the surprise rate cut. On Thursday, January 24, March S&P futures moved above the 10-day moving average, a bullish sign, but by Friday the market headed for a lower close. It’s been volatile, to say the least. The drop below 1360 offered a signal on Friday to get out if you were long. Now, let’s watch for support at 1225 - 1223, a previous breakout. In general, I see the situation as calm, and somewhat neutral for day traders early this week. The market may bounce around, pressing lower then rallying up a bit ahead of the FOMC meeting’s conclusion Wednesday. I see stabilization before then; people will want to get on the sidelines.

The way I see things now, I think the markets could be disappointed with the Fed. Given the Fed already delivered a 75 basis-point reduction this week, it may only offer up another reduction of 25 more on Wednesday. If the Fed is too aggressive, it won’t have any ammunition left, and they might fuel inflation further. After the meeting, if the Fed only cuts 25 basis points, I see the stock market falling out of bed. I’d be looking to sell S&P futures for a move down to 1290 in that case. I’d also be looking to sell gold futures, which I see falling possibly to $910 an ounce. If the Fed cuts more-than-expected, 75 basis points, then I think we are off to the races in both markets. If they cut 50, as expected, it will remain choppy as participants try to figure out where to go next. But I think the market should be satisfied and we would be more likely to see stocks move up, with March S&P possibly at 1485, and gold up $950.

Turning to other markets, crude oil prices were little changed net last week. The only notable price swings were on Wednesday and Thursday. The March futures fell $1.87 per barrel on Wednesday to $87.98 on fears of recession in the U.S. But prices rebounded $2.08 per barrel to $90.06 barrel on news of agreement between the Bush Administration and House leadership on a fiscal stimulus package that was seen as boosting the U.S. economy.

The yen currency appreciated on speculation investors will sell high yielding assets and pay back low cost loans from Japan as they bail out of carry trade positions. The yen rallied sharply on Wednesday, hitting its strongest level for two-and-a-half years against the dollar as rising risk aversion gripped the currency markets.

Financial Fundamental Reports:  Week of Jan 28 – Feb 01, 2008

Date	CT	Release	For	Actual		Consensus	Prior	Revised
Jan 28	09:00	New Home Sales	Dec			640K	647K
Jan 29	07:30	Durable Orders	Dec			2.1%	-0.1%
Jan 29	09:00	Consumer Confidence	Jan			86.9	88.6
Jan 30	07:15	ADP Employment	Jan				40K
Jan 30	07:30	GDP-Adv.	Q4			1.3%	4.9%
Jan 30	07:30	Chain Deflator-Adv.	Q4			2.7%	1.0%
Jan 30	13:15	FOMC Policy Statement
Jan 31	07:30	Employment Cost Index	Q4			0.85%	0.8%
Jan 31	07:30	Personal Income	Dec			0.45%	0.4%
Jan 31	07:30	Personal Spending	Dec			0.15%	1.1%
Jan 31	07:30	Core PCE Inflation	Dec			0.25%	0.2%
Jan 31	07:30	Initial Claims	01/26			317K	301K
Jan 31	08:45	Chicago PMI	Jan			52.8	56.6
Jan 31	09:30	Crude Inventories	01/26			NA	2297K
Feb 01	00:00	Auto Sales	Jan			5.3M	5.5M
Feb 01	00:00	Truck Sales	Jan			7.1M	6.9M
Feb 01	07:30	Nonfarm Payrolls	Jan			57K	18K
Feb 01	07:30	Unemployment Rate	Jan			5.1%	5.0%
Feb 01	07:30	Hourly Earnings	Jan			0.28%	0.4%
Feb 01	07:30	Average Workweek	Jan			33.9	33.8
Feb 01	09:00	Construction Spending	Dec			-0.53%	0.1%
Feb 01	09:00	ISM Index	Jan			47.8	47.7
Feb 01	09:00	Mich Sentiment-Rev.	Jan			79.5	80.5

Please feel free to call me at 866-231-7811 or contact me via email at jfriedman@lind-waldock.com if you have questions on this topic or to discuss specific trading strategies for your unique situation in this or other markets.

Good luck and good trading!

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