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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (10442)	8/10/2004 2:46:06 AM
From: Walkingshadow	Respond to of 116555

I disagree, and the probabilities given in that article fly in the face of what the markets have actually priced in. In recent years especially, the FOMC has not had the reputation of firing from the hip. And they would be particularly averse to doing so now, for a variety of reasons. First, they well remember the last time they shot from the hip, when they were too aggressive on the last round some years back, and had to eat crow and hastily reverse their course. Second, they deal with trends, not individual data points, or even 2 or 3 data points necessarily. It is too soon to conclude that a trend in jobs has been established. There has been a lot of volatility in the data points, and the FOMC will not be so easily headfaked. Sure, it looks like a duck, walks like a duck, swims like a duck. But the FOMC wants to hear it quack like a duck before they'll call it a duck. If they are too impulsive and are later proven wrong, that will make them look pretty stupid. Even if this does prove to be a trend in jobs, that doesn't a priori indicate the economy is faltering, and the FOMC will not use a single data source to reach that conclusion. Personally, I think the economy IS faltering, and that this will show up down the road in later economic reports. Unless and until the FOMC can cite several independent sources of evidence to support that conclusion, it will not reach that conclusion. At most, they will only say that they are aware of the data, and that prudence dictates that they monitor things carefully going forward for corroborative signs that may eventually justify considering an alteration in policy. The FOMC is determined to proceed in as orderly a way as possible. They don't have a hair trigger, and don't want one. Also, any departure from their stated policy of a "measured" adjustment of central rates would be tantamount to an admission that they were wrong, and that there is something seriously wrong with the economy. That is a conclusion they will not come to prematurely or lightly, particularly in an election year. The only thing that will elicit a departure from their stated policy is evidence of rising inflation, and they have warned the markets about this repeatedly. As of now, there is no evidence of rising inflation, although it remains to be seen how the PPI in particular comes in, given the spiking oil futures. Even if the PPI suggests inflationary trends, the FOMC will not likely act on a single data point, unless the evidence is both strong and independently corroborated. That is highly unlikely to occur, IMHO. The Fed Funds Futures simply do not support the probabilities given in that article. On Thursday, the futures had priced in a 100% chance of a 25 basis points hike at the August meeting, and an 89% chance of an additional 25 basis points at the Sept. 21 meeting. Today, those have changed to 100% and 40% respectively, since the implied rate from the December contract is 1.9%. These futures contracts will no doubt change somewhat with regards to the September meeting depending on the wording of the report, but I can't see the FOMC doing anything other than what the market fully expects. Also, I am more inclined to rely on the judgements of traders putting their money where there mouth is, as opposed to the various sources quoted talking out the sides of their necks. So right now, the market completely expects a 25 basis point rise Tuesday, and anticipates that at the September meeting, the FOMC will most likely (60% chance) leave things alone. That said, I anticipate that barring unexpected wording from the FOMC, the markets will use the fully expected 25 basis point increase as an excuse to stage an overdue technical relief rally on lackluster volume with enough short squeezing to keep many people fooled. And we'll no doubt hear the usual irrelevant bullish chatter from the talking heads that will help keep people fooled. JMVHO..... WS