Federal-Fund Futures moves up
Comment on my last blog:
It seems very likely that you are right; there will be a rate hike. I hardly think the hike had been "priced into the market"
MARKET ALERT
from The Wall Street Journal.
June 5, 2006
Stocks retreated following comments by Federal Reserve Chairman Ben Bernanke that raised worries of an interest-rate increase later this month. The Dow Jones Industrial Average fell 199.15 points, or 1.8%, to 11048.72; the Nasdaq Composite Index dropped 2.2% to 2169.62; and the S&P 500 fell 1.8%. The Russell 2000 small-cap index lost more than 3%. It was the third-worst one-day selloff of the year for the Dow and the second-worst day of the year for the Nasdaq and S&P.
...
Federal-funds futures, which before Mr. Bernanke spoke were pricing in about a break-even chance the Fed would raise its target interest rate again at the end of the month, priced in a roughly 70% chance after he spoke
No offense, but the last fed meeting minutes showed they toyed with the idea of a 50 basis points hike.
Anyone who believes they won't raise rates either isn't in the know, or isn't paying attention to what the FED is saying.
Inflationary pressures are strong and building even more. Once they get started, it takes a herculean effort to stem.
Most economists agree that a .25 hike is in the bag and the bond market has priced it in. Please be advised.
It seems very likely that you are right; there will be a rate hike. I hardly think the hike had been "priced into the market"
MARKET ALERT
from The Wall Street Journal.
June 5, 2006
Stocks retreated following comments by Federal Reserve Chairman Ben Bernanke that raised worries of an interest-rate increase later this month. The Dow Jones Industrial Average fell 199.15 points, or 1.8%, to 11048.72; the Nasdaq Composite Index dropped 2.2% to 2169.62; and the S&P 500 fell 1.8%. The Russell 2000 small-cap index lost more than 3%. It was the third-worst one-day selloff of the year for the Dow and the second-worst day of the year for the Nasdaq and S&P.
...
Federal-funds futures, which before Mr. Bernanke spoke were pricing in about a break-even chance the Fed would raise its target interest rate again at the end of the month, priced in a roughly 70% chance after he spoke
2 Comments:
Sorry about the mixup; here is what I posted on Sunday on my blog:
said...
Hi House Jockey:
You're right. I have been out of the loop; I missed the move downward on June 1: Very surprising move considering the potential. The way they get that "statistic" of 45% is basically hogwash since the take the going rate (5.102) and divide it by the difference of current location (5%) and potential location (5.25%), in other words .102/.25= 41%.
Not that this methodology doesn't have it's virtues, it tells us that the market has already built something in. Besides, just the day before it was 5.145%, putting it at about a 60% chance of a hike. (however, you can still discount the several weeks we have between now and then and come up with a figure that there is actually a higher probability because unpurchased securities represents an opportunity cost. The point is lost on many of the talking heads on MSM, which means it basically gets watered down; i.e. It basically assumes that if the Fed were to meet today (which it doesn't) and everyone were to know about it (which is an impossibility if they don't meet mid-meeting), the market has priced in a 45% chance of it happening.
Most importantly, if in one day, the sentiment can change from nearly 60% to about 45%, it could just as easily change back, even after accounting for the days' missed of interest. It will be interesting to see.
After PPI and CPI have come out, as well as several Fed insiders have pointed out inflation is "creeping up" to the higher level of acceptable, there is little question in the minds of most traders where it will be at the next meeting; don't mistake normal actions of the next few weeks to be a change in that thinking. We still have very low rates with very high money creation.
Sunday, June 04, 2006 10:11:11 PM
As an aside, the Washington Post yesterday posted the following:
At the close of trading Tuesday, July federal funds were pricing in 80 percent odds of a 5.25 percent federal funds rate after the Fed meets June 28-29
Either way, I don't think this has much effect on the housing market. The errant speculation is coming to a close, and it is likely that this decline will cause a rout in the homebuilding industry.
After the demand dips and speculators place their properties for resale, the homebuilders can only choose one of 2 roads:
1. Hold onto land and begin the write-downs without building in anticipation of future price increases.
2. Build at a near-loss (or actual loss) just to cover monthly finance charges and preserve some cash flow so they don't go bankrupt.
#2 was what they did last time (the big ones at least), since there is too great of an incentive to keep cash flow rather than have angry shareholders storming the castle.
Remember, the NAR estimated that >40% of all sales last year were to investors or second-home purchasers. It's not surprising that this year, most homebuilders are reporting 35-40% lower sales volumes. Add owner-user psychology to that, and we're likely to see even lower sales next year. Once the commodities prices fall due to reduced demand, as they have already started to do, it will ease some of the pressure on homebuilders to lower prices even more to create some volume.
I would suppose we would build ourselves into oblivion if we could.
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