I am still scratching my head over the Eurodollar rally on Friday that went out at the highs. (not that I am complaining mind you). Eurodollars were firm all day in spite of huge swings in the US$, huge swings in gold and silver, and smaller swings in treasuries. I am wondering if this is it:
Northern Trust - No Fed Rate Hikes In 2004
snip:
Last month our 2004 forecast incorporated four 25 basis point increases in the fed funds rate, the first of which to commence on August 10. By the close of business on December 14, we thought the FOMC’s fed funds rate target would stand at 2.00%. After listening to Fed Chairman Greenspan’s comments to both houses of Congress this past week and taking into consideration our below-consensus economic forecast, we have decided to erase the funds rate hikes we had penciled in for the second half of 2004. Not only is our 2004 funds rate forecast lower than last month’s, but so, too, is our forecast for the entire structure of interest rates. For example, in last month’s forecast, we had the Treasury 10-year note averaging 4.95% in the fourth quarter of this year. Now we are forecasting that the 10-year will average only 4.30% in the fourth quarter. Because of lower interest rate forecast and some revival in the growth of the money supply and bank credit, we are revising up our 2004 Q4/Q4 real GDP growth forecast from 3.5% to 3.8%. The lower interest rate environment is expected to provide a little more support to the housing sector and to consumer spending than what we had in last month’s forecast. At the same time, we are revising down our Q4/Q4 CPI forecast from 2.5% to 2.3%. Owners’ equivalent rent, the most highly-weighted single component in the CPI, continues to trend lower, biasing downward CPI inflation.
snip:
As alluded to at the outset, we have pushed back the first Fed rate hike into 2005 – March of 2005 to be exact. Although we are relatively sanguine about decent economic growth in 2004, we continue to wonder if some sort of “accident” is not lurking in the shadows of 2005. Our primary concern is a run on the dollar. The Chinese economy is showing signs of overheating, with consumer inflation on the rise. Deflation appears to be waning in Japan. By 2005, both the People’s Bank of China and the Bank of Japan may no longer find it in their respective economies’ best interest to restrain the rise in their currencies. If Asian central banks cut back on their role as dollar buyers of last resort, the greenback could plummet. This, in turn, would cause a spike in U.S. inflation and interest rates. Could the household sector, as leveraged as it is, survive a sharp increase in interest rates? This is a question to be answered in 2005, if even then. In 2004, don’t worry, be happy.
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read the rest here:
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