Daily Market Commentary
December 12, 2007
Confused? Join the crowd. The Fed cut the Fed Funds Rate as expected and left the door open for further cuts. So bond prices soared, stocks cratered and the US dollar rallied. This morning, bond prices are sinking, equity futures are higher and the dollar is weaker. Somewhere out there someone is playing with the joy stick.
We think that the Fed is in danger of falling behind the curve and perhaps that is why the markets were disappointed over this timid move even though that is what the market thought the Fed should do.
Oh well, back to the rest of the world. This morning, Canada's trade surplus surprised, by gaining $ 3.3 billion versus consensus of $ 2.3 billion.The Canadian dollar is slightly better on this news.Also, Canada's Import Price Index rose sharply, by 2.7% for the month and 11.4% year over year.
Tomorrow we will see the US PPI and the important retail sales number and these two releases should clarify somewhat what the Fed is looking at.
The Fed is also examining other methods of unlocking credit flows and is expected to announce such measures shortly. They could involve lengthier repo terms as well as a broader range of acceptable collateral.
Bank of Canada Governor Dodge, enjoying his lame duck status,spoke in a very stern way concerning the frozen ABCP market and the tepid flow of inter bank funds. He is right to be concerned as credit will not begin to flow just because the cost of money is lower. After all, the word credit is derived from the Latin, credere, which means to believe. One lends funds to another party if you believe that you will be paid back. There are a lot of non-believers in the market.
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