Market Outlook: 02192007

The financial market is now very bullish on the goldilocks economy (mainly US and global to some extent).  On the long end of the rate curve, market is expecting Fed at least not to raise rate, if not reducing in 2007

 

First, bonds, “mind of mkt ””one that tells every other market what to do”:  Looking at 3 months daily chart of 10 year Treasury yield,  the 9 SMA crossed below 18 SMA  @02122007, two days before Ben’s testimony, and then crossed below 27 SMA @02142007, the day of  Ben’s testimony.  The bond mkt’s rally has yet to slow down, momentum wise. The bond rally will continue for a while at least until TNX  tests its Jan 2007 low of 45.8, probably this week sometimes.

 

2^nd, US dollar: The currency mkt is bit slower than bond mkt in adjusting rate expectations: looking at USD index daily chart, USD  had triple tops near 200 MA resistances since late Jan 2007, and then reversed after Ben’s testimony and dropped below 50 MA. Technically, the momentum is for it to test its low of 83.2 in Jan 2007.

 

3^rd ,  commodity, “Doctor copper (PhD in economics)”: The CRB has been doing pretty well since touching almost of 2 year low of 284 in Jan 2007, and it has been able to stay above 50 day MA.32. Stable economic growth ahead?

 

 

US Fed as well as ECB central bankers is basically a group of monetarists. They correctly injected  tons of liquidity into economy, particularly since 911 out of the fear that US and Europe economy will slump into Japanese style deflation, and this liquidation injection definitely helped.  If it were for them only, they would definitely want to raise the rate to drain liquidity back, to leave some rooms for future rates cuts, and that is what any monetarists would do. That’s why some of them have been yelling all the time about wolf(inflation) is coming.

 

However, as I said in my previous writing, Wall Street is really the major and Fed  the junior in setting rate. You can’t really fool your big bro. If inflation were a real threat, WS would  punish Fed if Fed fails to raise the rate, like what happened in the 1^st half of 2006. The long end of the curve is almost always at single mercy of WS anyway, Fed can only control fed funds and to some extent influences short end of the curve.  But if inflation is trending down and not up, Fed would have no excuses to raise the rate. Now on inflation, where is it?   The annual inflation rate has averaged 2.8 percent since the start of 2000, down from 3 percent in the 1990s and 5.6 percent in the 1980s. Lower inflation has enabled the Fed to keep its benchmark overnight rate lower. It has averaged 3.24 percent this decade, compared with 5.12 percent in the 1990s and 9.86 percent in the 1980s. The reason is actually  pretty simple: China’s massive export of deflation into US and other parts of world. Only US GDP growth rate has not got back to its norminal rate of about 5% , due to US housing slump.

 

Raise rate just to get liquidity back? No way, WS will be pissed off.

 

In the coming week, CPI and other data will come in. I don’t expect significant changes to change WS’ happy mood now.