Everything was up on Monday – everything, that is, except the dollar, which continues to tank.
Expectations of a rate cut from the Fed, are of course, the main drivers behind the optimism. As the below graph, from Bloomberg via CreditSights, shows, most market participants surveyed are predicting a 25bp cut on Wednesday 31.
But there’s also a growing number who are anticipating a 50bp cut – which would see rates slashed to 4.25 per cent. As this second graph shows – from the latest report to investors by independent rating agency CreditSights – rates are currently about 25bp below where the market predicted they would be last month. And that steady disparity is helping shape the view that sentiment may still be about 25bp out of kilter.
As Jamie Chisolm points out in the FT’s Daily View, a 25bp cut has already been factored into the market – come Wednesday and they’ll almost certainly be a sense of disappointment.
The latest note to clients from CreditSights stakes the money on a 50bp cut. Consider Ben Bernanke’s speech on October 15 to the Economic Club of New York. Mr Bernanke was again at pains to reiterate the key points from the Feds September 18 meeting – crucially, the message that the Fed’s actions have always been underscored by the impact financial turmoil may have on the real economy. And the key point – the driver behind the Fed’s decision to cut rates by 50bp back in September – was housing. Here’s another graph from credit sights:
The only recession in the last fifty years not preceded by a housing collapse was the tech bubble in 2001. Little wonder, then, that housing is a major concern for the Fed. As Bernanke says in his speech:
“The housing correction and tighter credit could presage a broader weakening in economic conditions that would be difficult to arrest.”
Which is perhaps why the chief strategist at CreditSights, Louise Purtle, makes the gutsy call for a 50bp cut. Indeed, working on the standard assumption that policy changes take 12 months to work fully through, a 50bp cut now would come to the aid of the housing market when it reaches it’s nadir, by bearish assumptions, this time next year.