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Daily Market Commentary

If there's a time for us to start to focus back on the economic data from the extraneous noise surrounding the markets of late, it is this week.  there are piles of numbers out this week that should give us further indication of the state of the overall economy.  Remember, these are

Main St.
numbers including PPI, CPI, Retail Sales and housing numbers.


  Central Banks have been working fervently to re-balance the short end of the markets.  The BoJ, BoC, Fed and ECB have all injected liquidity into the market as the short funding needs of banks started to trade away from the central Banks' respective target rates.  Don't forget that the Banks are constantly doing these operations, however the scale on which we're seeing them currently seems to be about a ten year event.  This means that so far, the operations have been all in normal course of business.  We haven't seen any inter-meeting rate cuts yet, although the rumour mill was swirling on this front with some participants expecting the Fed to come in today.  We would consider that unlikely, but Bernanke is untested yet with regards to plunging markets, so his reaction has yet to be determined.


                Don't trust the Fed Funds futures (and their options) to point the direction (chart attached in Daily FI Snapshot), they are notoriously wrong and are now calling for highest probability of no action until the October meeting, where they will cut 75bps... not exactly what would seem like rational actions from the Fed.  Our best guess, if markets continue to be choppy, is a cut at the next meeting Sept 18th.  If the markets moderate or even turn higher, look for no action but a removal of their tightening (hawkish) bias, followed by cuts before the end of the year.


                With strong retail sales reported this morning, bonds are trading lower, and we would re-iterate not to expect mid-meeting rate cuts unless the equity markets continue to puke out, or there is a major market participant failure, be it a large fund, investment bank or brokerage firm.



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