Wednesday, April 11, 2007

Are Fed cuts dead?

Friday's market action in response to the strong non-farm payroll report seemed to take a Fed cut off the table in 2007. But not so fast. Don't forget the following:

  • Job growth is a lagging indicator. Firms don't tend to lay people off until demand has slacked for their products. So the slack demand tends to come first, job losses second.
  • The particular pressure on the financial system today relates to mortgage lending. A small number of Fed cuts may be especially potent in response to that specific problem.

So I still think there will be 1-2 cuts this year. At least some people in the market agree with me, as we've had small rallies the last two days and steepened by 1bp. We'll know more at 10AM when the minutes are released.

My prediction would be a bull steepener. Friday's action clearly tells you the street is lined up for a hawkish tone to the minutes. Remember, they were set up for a hawkish initial statement from the Fed and didn't get it. My bet is on the same today.

I will say for those who want a cut in June, its too late for that now.


Anonymous said...

Ah... I can finally leave you comments.

I like how we differ so much with what we got out of the last Fed meeting. I actually took it as being hawkish. I know that I was also in the minority.

I think the market is going to see exactly how concerned they are about inflation. Should be an interesting minutes.

But, the real meat and potatoes is going to come from their take on resource utilization. I think that's the biggest concern.

Anonymous said...

Okay, the minutes were construed as hawkish. The stock market contracted.

But the euro kept ascending through the stratosphere.

Yes, it is well known that the ECB is going to raise rates again, but that was known before the minutes.

Why did the euro go up in "response" to the minutes?