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UK stocks today are mildly higher (FTSE +0.27%) as the UK mortgage banking situation improved today. However, European stocks as a whole are trading slightly lower with the European DJ Stoxx 50 down -0.15%. Asian stocks today closed lower with the Nikkei index down -2.02%, Hong Kong down -0.09%, China down -0.40%, and Australia down -1.26%.
The UK mortgage banking situation improved today after the Bank of England yesterday pledged to guarantee the deposits in Northern Rock and any similarly-situated solvent bank. Northern Rock's stock today rose +10%, regaining some ground after falling 56% in the previous two sessions. Competitor Alliance & Leicester Plc, recovered by 26% today.
FOMC meeting – The FOMC meets today in the most-anticipated FOMC meeting in years. The October federal funds futures contract yesterday closed at a yield of 4.875%, which means that the market is discounting an average 4.875% funds rate during the month of October. Under normal circumstances that would mean the market is discounting a 100% chance of a 25 bp rate cut today and a 50% chance of a 50 bp cut. However, the Fed has been allowing the funds rate to trade at an average of about 20 bp below the official funds rate target. That means that the 4.875% level in the October fed funds futures market is also consistent with the idea that the Fed may only cut the official funds rate target by 25 bp to 5.00% but then allow the average daily funds rate to trade 12.5 bp below the new 5.00% target at 4.875%.
In any event, the market is expecting the FOMC in its post-meeting statement to adopt a bias toward easing and to perhaps provide some assurance that the Fed will provide liquidity to the banking system as needed to prevent any fresh crisis of confidence. The market is also expecting the Fed today to cut the
\n\t\u003cli\> The US stock and bond markets may show a knee-jerk negative reaction today if the Fed only cuts the funds rate by 25 bp since some vocal market commentators are calling for a 50 bp cut. However, FOMC members have shown a wide variety of opinions about the impact of the financial market crisis and it may be difficult to garner a majority vote for a 50 bp cut. The market therefore will not be particularly surprised by a 25 bp rate cut and a negative reaction may be short-lived since the markets can then at least be assured that the Fed will cut another 25 bp notch at the next FOMC meeting on Oct 30-31.\u003cp\>\n\t\u003cli\> PPI – Today’s Aug PPI report is expected to show a decline of -0.3% m/m overall and a small +0.1% increase excluding food and energy. That would follow the July report of +0.6% m/m overall and +0.1% core. On a year-on-year basis, the overall Aug PPI is expected to ease to +3.2% from +4.0% in July, and the core PPI is expected to ease slightly to +2.2% from +2.3% in July. The expected decline in the year-on-year PPI figures would help the Fed justify a rate cut today even though the negative effects of the mortgage and financial market crisis have yet to be seen in the real economy to a significant degree. The Fed will be putting aside any inflation fears it may still have at present in favor of a pre-emptive easing, but a decline inflation figures would nevertheless be helpful to the Fed’s cause.\u003cp\>\n\t\u003cli\> NAHB index – Today’s Sep NAHB housing market index is expected to fall -2 points to 20, adding to the -2 point decline to the 16-year low of 22 seen in August. The expected report today of 20 would match the record low for the series posted in Jan 1991 (the history of the series goes back to Jan 1985). The NAHB index measures the sentiment among US homebuilders on the single-family home market, with 50 being the demarcation between a “good” versus “poor” outlook for the single-family home marketplace. Today’s report for September will more accurately pick up the sentiment of homebuilders in the wake of the mortgage and banking crisis, which started on Aug 8 when BNP Paribas announced a halt of investor withdrawals from three of its investment funds.",1]
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5.75% discount rate by at least the same amount as the funds rate target. The Fed may even cut the discount rate by more than the funds rate target, creating a narrower penalty margin of the discount rate above the funds rate target. For example, the Fed could cut the funds rate target by 25 bp to 5.00% and cut the discount rate by 50 bp to 5.25%, thus narrowing the penalty spread to 25 bp. The Fed has been trying to encourage banks to borrow at the discount window if needed, but banks can only do that at a penalty of more than 50 bp at present.
The US stock and bond markets may show a knee-jerk negative reaction today if the Fed only cuts the funds rate by 25 bp since some vocal market commentators are calling for a 50 bp cut. However, FOMC members have shown a wide variety of opinions about the impact of the financial market crisis and it may be difficult to garner a majority vote for a 50 bp cut. The market therefore will not be particularly surprised by a 25 bp rate cut and a negative reaction may be short-lived since the markets can then at least be assured that the Fed will cut another 25 bp notch at the next FOMC meeting on Oct 30-31.
PPI – Today’s Aug PPI report is expected to show a decline of -0.3% m/m overall and a small +0.1% increase excluding food and energy. That would follow the July report of +0.6% m/m overall and +0.1% core. On a year-on-year basis, the overall Aug PPI is expected to ease to +3.2% from +4.0% in July, and the core PPI is expected to ease slightly to +2.2% from +2.3% in July. The expected decline in the year-on-year PPI figures would help the Fed justify a rate cut today even though the negative effects of the mortgage and financial market crisis have yet to be seen in the real economy to a significant degree. The Fed will be putting aside any inflation fears it may still have at present in favor of a pre-emptive easing, but a decline inflation figures would nevertheless be helpful to the Fed’s cause.
NAHB index – Today’s Sep NAHB housing market index is expected to fall -2 points to 20, adding to the -2 point decline to the 16-year low of 22 seen in August. The expected report today of 20 would match the record low for the series posted in Jan 1991 (the history of the series goes back to Jan 1985). The NAHB index measures the sentiment among US homebuilders on the single-family home market, with 50 being the demarcation between a “good” versus “poor” outlook for the single-family home marketplace. Today’s report for September will more accurately pick up the sentiment of homebuilders in the wake of the mortgage and banking crisis, which started on Aug 8 when BNP Paribas announced a halt of investor withdrawals from three of its investment funds.
The UK mortgage banking situation improved today after the Bank of England yesterday pledged to guarantee the deposits in Northern Rock and any similarly-situated solvent bank. Northern Rock's stock today rose +10%, regaining some ground after falling 56% in the previous two sessions. Competitor Alliance & Leicester Plc, recovered by 26% today.
FOMC meeting – The FOMC meets today in the most-anticipated FOMC meeting in years. The October federal funds futures contract yesterday closed at a yield of 4.875%, which means that the market is discounting an average 4.875% funds rate during the month of October. Under normal circumstances that would mean the market is discounting a 100% chance of a 25 bp rate cut today and a 50% chance of a 50 bp cut. However, the Fed has been allowing the funds rate to trade at an average of about 20 bp below the official funds rate target. That means that the 4.875% level in the October fed funds futures market is also consistent with the idea that the Fed may only cut the official funds rate target by 25 bp to 5.00% but then allow the average daily funds rate to trade 12.5 bp below the new 5.00% target at 4.875%.
In any event, the market is expecting the FOMC in its post-meeting statement to adopt a bias toward easing and to perhaps provide some assurance that the Fed will provide liquidity to the banking system as needed to prevent any fresh crisis of confidence. The market is also expecting the Fed today to cut the
\n\t\u003cli\> The US stock and bond markets may show a knee-jerk negative reaction today if the Fed only cuts the funds rate by 25 bp since some vocal market commentators are calling for a 50 bp cut. However, FOMC members have shown a wide variety of opinions about the impact of the financial market crisis and it may be difficult to garner a majority vote for a 50 bp cut. The market therefore will not be particularly surprised by a 25 bp rate cut and a negative reaction may be short-lived since the markets can then at least be assured that the Fed will cut another 25 bp notch at the next FOMC meeting on Oct 30-31.\u003cp\>\n\t\u003cli\> PPI – Today’s Aug PPI report is expected to show a decline of -0.3% m/m overall and a small +0.1% increase excluding food and energy. That would follow the July report of +0.6% m/m overall and +0.1% core. On a year-on-year basis, the overall Aug PPI is expected to ease to +3.2% from +4.0% in July, and the core PPI is expected to ease slightly to +2.2% from +2.3% in July. The expected decline in the year-on-year PPI figures would help the Fed justify a rate cut today even though the negative effects of the mortgage and financial market crisis have yet to be seen in the real economy to a significant degree. The Fed will be putting aside any inflation fears it may still have at present in favor of a pre-emptive easing, but a decline inflation figures would nevertheless be helpful to the Fed’s cause.\u003cp\>\n\t\u003cli\> NAHB index – Today’s Sep NAHB housing market index is expected to fall -2 points to 20, adding to the -2 point decline to the 16-year low of 22 seen in August. The expected report today of 20 would match the record low for the series posted in Jan 1991 (the history of the series goes back to Jan 1985). The NAHB index measures the sentiment among US homebuilders on the single-family home market, with 50 being the demarcation between a “good” versus “poor” outlook for the single-family home marketplace. Today’s report for September will more accurately pick up the sentiment of homebuilders in the wake of the mortgage and banking crisis, which started on Aug 8 when BNP Paribas announced a halt of investor withdrawals from three of its investment funds.",1]
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5.75% discount rate by at least the same amount as the funds rate target. The Fed may even cut the discount rate by more than the funds rate target, creating a narrower penalty margin of the discount rate above the funds rate target. For example, the Fed could cut the funds rate target by 25 bp to 5.00% and cut the discount rate by 50 bp to 5.25%, thus narrowing the penalty spread to 25 bp. The Fed has been trying to encourage banks to borrow at the discount window if needed, but banks can only do that at a penalty of more than 50 bp at present.
The US stock and bond markets may show a knee-jerk negative reaction today if the Fed only cuts the funds rate by 25 bp since some vocal market commentators are calling for a 50 bp cut. However, FOMC members have shown a wide variety of opinions about the impact of the financial market crisis and it may be difficult to garner a majority vote for a 50 bp cut. The market therefore will not be particularly surprised by a 25 bp rate cut and a negative reaction may be short-lived since the markets can then at least be assured that the Fed will cut another 25 bp notch at the next FOMC meeting on Oct 30-31.
PPI – Today’s Aug PPI report is expected to show a decline of -0.3% m/m overall and a small +0.1% increase excluding food and energy. That would follow the July report of +0.6% m/m overall and +0.1% core. On a year-on-year basis, the overall Aug PPI is expected to ease to +3.2% from +4.0% in July, and the core PPI is expected to ease slightly to +2.2% from +2.3% in July. The expected decline in the year-on-year PPI figures would help the Fed justify a rate cut today even though the negative effects of the mortgage and financial market crisis have yet to be seen in the real economy to a significant degree. The Fed will be putting aside any inflation fears it may still have at present in favor of a pre-emptive easing, but a decline inflation figures would nevertheless be helpful to the Fed’s cause.
NAHB index – Today’s Sep NAHB housing market index is expected to fall -2 points to 20, adding to the -2 point decline to the 16-year low of 22 seen in August. The expected report today of 20 would match the record low for the series posted in Jan 1991 (the history of the series goes back to Jan 1985). The NAHB index measures the sentiment among US homebuilders on the single-family home market, with 50 being the demarcation between a “good” versus “poor” outlook for the single-family home marketplace. Today’s report for September will more accurately pick up the sentiment of homebuilders in the wake of the mortgage and banking crisis, which started on Aug 8 when BNP Paribas announced a halt of investor withdrawals from three of its investment funds.
