In an article that should be in the WSJ on Friday, September 7th, titled Treasurys Fall as Fed Warns on Rate-Cut Optimism, we find that there were no less than six Fed officials that spoke on Thursday. All of them indicated that there was undo optimism in the markets that the Fed would cut rates any time soon. The first section of the article makes it clear that the markets reacted to the news appropriately, the bonds sold off and the stock market came off its highs of the day.
In the morning a rumor hit the markets that the jobs’ report was going to give the Fed the opportunity to lower rates in a surprise move on Friday. Well, after the rumor it would hardly be a rumor but we’ll let that go for now. You can look at a chart of trading activity for the market and kind of see when the rumor gained support. This is certainly true on the gold chart if you have the ability to see one. (kitco.com is a good site for gold prices—we should probably add it to our links) Anyway, as more and more Fed officials trotted out to say the same thing, the markets kind of cooled.
To get back to the WSJ article, we see that the second section of the article talks about the Fed’s open market moves. Apparently, on Thursday the Fed felt the need to inject some liquidity into the market as they supplied $31.25 billion in three separate moves. According to the article, three moves in one day is fairly uncommon, the last one occurring back on August 10th “following a spike in short-term rates”.
We fail to see how these two sections fit together. On the one hand, the Fed says they are not committed to lowering rates at their meeting in a couple of weeks but on the other hand they are pushing liquidity into the banking system at quite a furious rate it seems. The article mentions that the European Central Bank (ECB) added about $130 billion on Wednesday. What?
Let’s get down to the real business—the stock market. Well, Friday is the big day, Fed moves or not. We finally get to see the jobs’ report and what it might have to do with the stock market. The market is, how can this be, hoping for a disastrous number so the Fed will have the ability to lower rates. Apparently, the traders are not so worried about the jobs so much as the market, but that’s another topic. The question is how will the market react to the news?
Ideally, we will see truth in the number which should mean that there will be a poor number being put up. The consensus we see this evening is for 110K new nonfarm jobs to have been created in August. With a number less than that, we would expect the stock market, and bonds, to have a good start to the day. This assumes the market still believes that the Fed will lower rates and very soon. Ideally, from our perspective, this opening trade would be the stock market high for the next several months. We could just see a normal number around 110K and the market would just trade like it did on Thursday, very dull trading indeed.
With this number finally behind us, the market can be free to trade on its own and we are so waiting for this. September should still be a down month and with this Friday morning thing out of the way, we can get on with it.
We would like to make a comment on the Fed. We have been in the camp that expects a rate cut this fall and we’ve been in that camp for a long time. We never wavered when the rumors were that the next move of the Fed would be to hike rates. We said, no way.
So, here we are and fall is in the air; not to mention mortgage problems are in the air. We don’t see the news or the market really showing us a great deal of reason for a rate cut right here this day but the Fed will decide to pull the trigger on rates within a couple of months. This will most likely be driven by a stock market drop that occurs here in September. At that time we will be interested to see where the market is and whether we should be positioning to take some long positions. There is a lot of ground to cover before that happens but this is the situation at hand in our humble opinion.