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Pastimes : Clown-Free Zone... sorry, no clowns allowed

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To: Terry Maloney who wrote (343073)	9/9/2007 5:58:33 PM
From: Giordano Bruno	Read Replies (1) of 436258

US Dollar: Will the Fed be Proactive or Reactive? Volatility has rocked the financial markets after the shockingly weak non-farm payrolls report. Economists were looking for companies to add 100k jobs last month, but they ended up firing more people than they hired. The Federal Reserve can no longer pretend that the subprime and credit crisis is not having an impact on the overall economy. It is and in a very serious way. At the end of trading today, Countrywide Financial announced job cuts of up to 12k. The only choice that they have at this point is between cutting interest rates by 25 or 50bp. After today’s non-farm payrolls number, the interest rate curve is pricing in 75bp of easing. There are even rumors about the possibility of an emergency intermeeting cut. The chance of this is low since the FOMC meeting is only 7 trading days away. The bigger question will be whether the Fed chooses to be proactive or reactive. If they really want to do more than put a band aid on the problems that the US economy currently faces, they will need to surprise the markets with a half point cut, but based upon the measures that we have seen from Bernanke so far, it is more likely that the Fed to play it safe with by cutting interest rates 25bp. The weak non-farm payrolls number has sent stocks, carry trades and the Dow tumbling. The dollar has been completely stripped of its safe haven status as job losses point to weak spending in the months to come as well as the risk for a recession. Retail sales are the most important release on the economic calendar next week. After today’s payrolls number, everyone will be looking for consumer spending to confirm that the economy is continuing on a downward spiral but we actually don’t think that retail sales in August will be that bad. The last time job growth was negative was in August 2003. That month retail sales jumped 1.6 percent but in September and October, spending fell -.8 percent and -.5 percent respectively. Therefore it may be another month before we see a meaningful contraction in spending.

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