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Daily Market Commentary

The data will be heavy this week, both sides of the border.  As Bernanke and the Fed come out with what will probably be the most watched and analyzed rate decision in some time, we will also be bombarded with inflation, housing and leading indicators.


We continue to see the Fed cutting by 25 bps tomorrow, rather than the 50 that many are calling for.  As of now, there is no emergency in the market, and Bernanke will not want to give the impression that the Fed thinks there is one.  Measured 25 bp hikes were the rule on the way up, and it will be so on the way down, unless an emergency develops.


What is interesting to note, however, is the length of time it actually takes for Fed rate movements to really work their way into the economy.  Today's woes of excessive speculation and highly geared structured financial products are being blamed on an interest rate policy that ended on June 30, 2004.  While Fed cuts will provide great psychological relief to the markets, Bernanke is well aware that the 1% policy of June 2003 to June 2004 may very well have caused the excess we are seeing now.  Throw in a Japanese ZIRP (Zero Interest Rate Policy) from Feb 1999 through 2006 (Japanese overnight target is now 0.5%) and a much more global financial system, and we see that these cycles play out over years.


  In news outside of economic releases, the Northern Rock turmoil continues and is almost playing out like a run on the bank.  Individuals are withdrawing their money, and shares are tumbling.  Surprisingly, this is not having a great effect on the Gilt market.  While the Gilt curve has rallied to lower yields, it is still very inverted (3 month @ 5.60%, Ten year @ 4.85%), and there has been very little steepening over the past few weeks as we have seen in the treasury market.  We would have expected to see the short end rally more as the Bank of England stepped in to save Northern Rock.



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