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How Much Will the Fed Cut?


There is a fair amount of doubt about whether the Fed cuts will be by a quarter or half a percentage point.

I am writing this piece from New York, as a cold Big Apple readies itself for the Christmas season. Irrespective of the fact that NYC was supposedly displaced by London as the financial capital of the world, it remains a fascinating hub for the investment fraternity and a seriously good adrenalin booster.

My meetings of the past two days are testimony of this. Included on the itinerary were: a discussion with friend Barry Ritholtz's about his new stock-screening system, IQ Fusion; a visit to Minyanville headquarters; a "happy hour" at the classic Bull & Bear bar at The Waldorf-Astoria where Fox Business Network's Cody Willard was interviewing a number of investment luminaries, including Todd Harrison, Jeff Saut and Tony Dwyer; a unique "Holiday Festivus" BBQ in the heart of Manhattan in the aid of Minyanville's Ruby Peck Foundation for children's education; and a superb viewing, together with business partner John Mauldin, of the Radio City Christmas Spectacular featuring The Rockettes.

Enough said of the good times in NYC. Let's get back to another adrenalin booster – the business of reviewing the financial markets' actions of the past week on the basis of economic statistics, a performance chart and some thought-provoking quotes from an array of market commentators.


Better-than-expected US productivity and jobs reports eased concerns that the world's largest economy will fall into recession. Meanwhile the housing sector continues to weaken, thereby negatively affecting consumer sentiment. While the mixed economic data have most observers expecting an interest rate cut, there is a fair amount of doubt about whether the Fed Funds rate will be reduced by a quarter or half a percentage point at the FOMC's meeting on Tuesday, December 11.

On Thursday the White House announced a "bail-out plan" to stem the wave of residential mortgage foreclosures in the US by offering many sub-prime borrowers burdened with adjustable-rate mortgages a five-year mortgage-rate freeze. This announcement was not universally praised as gleaned from Richard Russell's reaction: "… all it will do is allow selected homeowners to hang on a while longer to their homes, but for most it will just delay the inevitable".

In general, investors were hesitant to make large moves before next week's policy-setting meeting.

Source: Gold Seeker Weekly Wrap-Up, December 7, 2007.

This week's economic highlights include Pending Home Sales on Monday, Wholesale Inventories and an FOMC policy statement on Tuesday, Export and Import Prices, the Trade Balance, and the Treasury Budget on Wednesday, Retail Sales, PPI, Initial Jobless Claims, and Business Inventories on Thursday, and CPI, Industrial Production, and Capacity Utilization on Friday.


The performance chart obtained from the Wall Street Journal Online indicates how different global markets fared during the past week.

Click to enlarge

Source: Wall Street Journal Online, December 2, 2007.

The US stock market indices rallied on the back of the Bush Administration's "sub-prime rescue plan", recording gains for the second week running. Europe also edged higher, helped by Wall Street and a good performance from interest-rate-sensitive stocks in the UK. The Nikkei 225 Average rose to a one-month high (notwithstanding disappointing GDP data), with the rest of Asia and other emerging markets also jumping on the bandwagon.

The Bank of England (BoE) cut interest rates by 25 basis points to 5.5% on Thursday, following a surprise quarter-point cut to 4.25% by the Bank of Canada on Tuesday.

Interest-rate differentials (factoring in a smaller-than-previously-expected Fed Funds rate cut) resulted in the British pound coming under pressure and the US dollar index edging up against a basket of currencies. Global bond markets also cottoned on to the less gloomy economic outlook, causing the first weekly increase in yields in a month.

The oil price was influenced during the week by OPEC's decision on Wednesday not to increase its oil output, but it eventually edged lower on doubts that demand levels can support current prices, as well as reports of additional exploration for new deposits.

As far as other commodities were concerned, precious metals gained handsomely during the week, but industrial metals (-2.3%) came under renewed pressure.
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