[Bonds futures: one-month chart]
Friday, October 19, 2007
Bonds: rally or range? The Fed would love to see a rally...
Market expectation for another fed rate cut has risen sharply this week, shooting euro, yen, crude, gold, and silver through major resistance levels (silver still needs to break $14.1). Bond prices also had a strong rally to long term resistance, and a break will send bonds to 114-115. The Fed certainly does not want to see dropping bond prices and a steepening yield curve. This signals rising inflation expectations, which make it harder for the Fed to cut rates. With adjustable-rate mortgage resets in the horizon, a rate cut at the end of October is necessary; the only question is whether another rate cut will be sufficient (probably not).
[Bonds futures: one-month chart]
[Bonds futures: one-month chart]
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The market had a strong sell off today. The economy looks to be slowing more significantly than expected (look at CAT's earnings). Also, oil is broke the significant $90 level. With inflation rising, the credit issue worsening, and commodities prices putting pressure on profit margins of oil and metal companies, the market it factoring in a 100% of a fed rate cut this month. Personally, this probably won't help the slowing economy and diving dollar. One hope is that the weak dollar increases exports from the US, stimulating corporate growth. Another is that the international markets continue to grow and US companies with investments internationally help the earnings. I'm going to look for numbers from Apple, Haliburton, etc. to see whether or not this economy is in a recession.
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