Fed may cut interest rate in oct metting, chances are 80%

Conditions within the US financial markets continued to dominate investor sentiment and currency trends for much of the week. The increasing mood of uncertainty contributed to choppy trading conditions and also made it difficult to secure a decisive trend.

Following the announcement late last week, the Treasury continued to push for congressional agreement over a US$700bn support package for the financial sector.
Political tensions increased later in the week with President Bush stark in his warnings over the severe negative impact if an agreement was not reached.

Money-market tensions remained extreme and global central banks aggressively provided liquidity to help ease these strains and allow markets to function.

Congressional leaders looked to be near a framework agreement on Thursday, but there were then fresh tensions as a group of Republicans looked to promote an alternative package amid acrimonious talks. There was no resolution by early on Friday.

Fed Chairman Bernanke was generally downbeat over the economic prospects and more pessimistic than in recent comments. He stated that growth would be likely to be substantially below potential over the second half of 2008. Market stresses could be a considerable drag while commercial real-estate loan conditions had tightened substantially. Bernanke also stated that recent inflation news had been slightly more favourable.

There were only limited US data releases over the first half of the week. The pace of releases then picked up and had a generally weak tone. Existing home sales dipped slightly to an annual rate of 4.91mn from 5.02mn the previous month while prices were lower. The latest national survey also recorded a further decline in house prices.

The was a sharp 4.5% decline in durable goods orders for August while initial jobless claims continued to increase to 493,000 in the latest week. Although there may have been distortions from hurricanes, the evidence suggested an underlying deterioration.

In view of the depressed data releases, markets moved to price in at least an 80% chance of an interest rate cut at the October FOMC meeting.

Author - Kamlesh Jogi (Commodities Research Analyst)
Mail : kamleshjogi@gmail.com