Will GDP And NFP Readings Curb Expectations Of A Fed Hike?

The Federal Reserve is scheduled to meet next Tuesday; but despite the dollar’s recent strength, the market is pricing in little chance of a quarter-point rate hike when everything is said and done. Currently, Fed Fund futures show a 6.3 percent probability of a hike to 2.25 percent – a significant drop from the nearly 25 percent odds measured only a month ago. Despite this expected passivity in the near-term however, traders still see a 71.5 percent chance that the central bank will tighten by the year’s end and shake the two-year easing/neutral cycle.

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[/I][B]CREDIT MARKET: HOW IS IT DOING?[/B]

                                     The Federal Reserve is scheduled to meet next   Tuesday; but despite the dollar’s recent strength, the market is pricing in   little chance of a quarter-point rate hike when everything is said and done.   Currently, Fed Fund futures show a 6.3 percent probability of a hike to 2.25   percent – a significant drop from the nearly 25 percent odds measured only a   month ago. Despite this expected passivity in the near-term however, traders   still see a 71.5 percent chance that the central bank will tighten by the   year’s end and shake the two-year easing/neutral cycle. All of this could   change very quickly though as major event risk approaches. Both the 2Q GDP   and July NFP numbers will offer a conclusive measure of strength for the   world’s economy. And, considering the optimistic forecasts for growth and   fragile state of financial markets, a disappointment here could have severe   repercussions.

                         [B]A DEEPER LOOK INTO THE CHANGES THIS WEEK:[/B]

While demand for less risky Treasury and short-term paper has steadied over the past week, market participants are still clearly looking for security in a market racked by uncertainty. Rates on the three-month T-Bill slipped after news that the Fed’s July 28th $75 billion TAF auction was met with $90.56 billion in bids – marking another month that the market has indicated that liquidity is still scarce. The same concerns are registered out in the market place, with Merrill Lynch’s massive write downs and the high premiums on WaMu default protection.

[B]FINANCIAL MARKETS: HOW ARE THEY DOING?[/B]

                         [B]A DEEPER LOOK INTO THE CHANGES THIS WEEK:[/B]

         While stock benchmarks were relatively unchanged over the   week, price action has been quite volatility. The Financial sector has seen   the worst of its thanks to a series of earnings losses, massive write downs   and liquidity concerns – not to mention the failure of two more banks.   However, not to be outdone, consumer-related businesses are also feeling the   sting of dramatic price action as low consumer confidence and high input   prices force production managers to scale back.

         Not only is dramatic price action reflecting concern, but   market condition indicators are also painting a picture of growing caution.   With GDP due this week and the Fed decision scheduled for Tuesday, implied   volatility has pulled out of its dive to rise back above 22 percent. Further   exposing the potential for a very disappointing outcome from all the data,   the put-call ratio has climbed back above a ratio of 3 bearish puts for ever   two bullish calls. 

[B]
U.S. CONSUMER: HOW ARE THEY DOING?[/B]

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         A DEEPER LOOK INTO THE CHANGES THIS WEEK:

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         Major economic indicators have been relatively promising –   though only in comparison to readings from the past few months. The business   proxy in durable goods orders rose 1.4 percent, both prominent consumer   confidence readings improved and the government’s new home sales gauge showed   the biggest drop in inventories in 40 years. However, the question the market   will be asking is whether this enough to justify speculation for the US   economy to avoid a recession in the second half. Conditions for the consumer   are only expected to worsen, the housing market is still deep in recession   and businesses continue to struggle with high material costs and waning   demand. 

[I]Have comments or questions on this or other articles authored by John? E-mail him at <[email protected]>.[/I]