"HOPE IS INDEPENDENT OF THE APPARATUS OF LOGIC." Norman Cousins
Logic would say the financial news of the week should have put stock prices on the downslide. Industrial production was up just 0.2%, its weakest advance in 3 months, reflecting a 0.3% decline in output from U.S. factories. The week also saw record oil prices, closing above $80 a barrel for the first time on Thursday, then ending the week at $79.10. Friday, the Commerce Department announced that August Retail Sales, the most important indicator of the week, were up a less-than-anticipated 0.3%. Even worse, when strong August auto sales were excluded, the number was actually down 0.4%. Friday's trading was also colored by fresh concerns over the fallout from tight credit markets, when the Bank of England announced it would grant emergency funding to Northern Rock PLC, a lender facing a possible liquidity crisis.
So how did the markets react? The Dow rose to 13,442.52, an advance for the week of 2.5%--its best showing since April 22. In the broader indexes, the S&P 500 was up 2.2% and the NASDAQ up 1.4%-- their biggest weekly gains since mid-August.
Here's the logic, Wall Street style. The week's less-than-stellar economic and credit market news wasn't bad enough to spark recession worries, but should still push the Fed to cut its rate come Tuesday. That will ignite the markets, so now's the time to buy. Net result? The markets go up. An ordinary person relying merely on common sense might miss this play, of course.
On the bond side of the Street, Mortgage Bonds lost nearly 60 basis points, which worsened home loan rates. In the government bonds arena, the yield on the benchmark 10-year Treasury note fell to 4.46% on Friday.
>> This Week's Forecast
HERE COME THE FEDS.
There's a healthy roster of heavy happenings in the coming week, led by the biggest whopper of them all--Tuesday's FOMC (Federal Open Market Committee) meeting. Everyone expects the Fed to cut the funds rate by .25%, and many are looking for .50%. The central bank has left this benchmark rate unchanged at 5.25% for over a year following a string of monthly increases, and hasn't had a rate cut since 2003. A cut will make some borrowing less expensive, but not all costs will come down. Some ARMs (adjustable rate mortgages) are tied to benchmarks other than the Fed, such as the LIBOR (London Interbank Offered Rate), which last week hit multiyear highs. Bonds are aggressively priced for rate cuts and a disappointment by the Fed will only open up the ground beneath them.
In addition, this week three major investment banks will be reporting their quarterly results. This could give new spin to the credit situation, depending on their subprime exposure. Finally, our economic calendar features potentially enlightening PPI, CPI, and Housing Start reports.
>> The Week's Economic Indicator Calendar
Remember, in general, weaker than expected economic data is good for interest rates, while positive data causes rates to rise.
Economic Calendar for the Week of Sept 17 - Sept 21
Date | Time (ET) | Release | For | Consensus | Prior | Impact |
Sep 17 | 08:30 | NY Empire State Index | Sep | 18.0 | 25.1 | Moderate |
Sep 18 | 08:30 | Producer Price Index (PPI) | Aug | -0.1% | 0.6% | Moderate |
Sep 18 | 08:30 | Core PPI | Aug | 0.1% | 0.1% | Moderate |
Sep 18 | 14:15 | FOMC policy statement | | | | HIGH |
Sep 19 | 08:30 | Consumer Price Index (CPI) | Aug | 0.0% | 0.1% | HIGH |
Sep 19 | 08:30 | Core CPI | Aug | 0.2% | 0.2% | HIGH |
Sep 19 | 08:30 | Housing Starts | Aug | 1360K | 1381K | Moderate |
Sep 19 | 08:30 | Building Permits | Aug | 1350K | 1373K | Moderate |
Sep 19 | 10:30 | Crude Inventories | 09/14 | NA | -7011K | Moderate |
Sep 20 | 08:30 | Initial Jobless Claims | 09/15 | NA | 319K | Moderate |
Sep 20 | 10:00 | Index of Leading Economic Indicators | Aug | 0.0% | 0.4% | Low |
Sep 20 | 12:00 | Philadelphia Fed Index | Sep | 2.0 | 0.0 | HIGH |
>> Federal Reserve Watch
Forecasting Federal Reserve policy changes in coming months.
Consensus is building for the Fed to cut the fund rate on Tuesday, but it's holding to a .25% drop, not the .50% drop many experts are hoping for.
Current Fed Fund Rate: 5.25%
After FOMC meeting on: | Consensus |
Sept 18 | 5.00% |
Oct 31 | 4.75% |
March 18 | 4.75% |
Odds of change from current policy:
After FOMC meeting on: | Consensus |
Sept 18 | 84% |
Oct 31 | 86% |
March 18 | 93% |
*Information Courtesy of Tonya Esquibel, CTX Mortgage, Franklin, TN*
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