Daily Market Commentary
January 23, 2008
The bond market says "good, but not enough" to the Fed's surprise 75 bp cut yesterday.
Fed Funds futures are still pricing in another 50 bps coming next week at the regularly scheduled meeting.
The Bank of Canada disappointed some by only cutting 25bps. Many argue the contagion from the US will spread north of the border (myself included), and feel that the BoC should be more pro-active on that front. In fairness, the gap opened up by the Fed cut yesterday came only minutes before the BoC release... and AFTER the Bank had locked up their press release. The die was cast before the surprise cut.
With our rates now 50 bps higher than the US, the CAD$ got a boost against the greenback.
The Big banks decided to move along with cutting the prime rate despite some chatter last week about leaving the prime where it is despite overnight rate cuts. We'd applaud them, but I don't think applause is deserved for doing what should never have been questioned in the first place. The BoC doesn't lower rates to allow the big banks to increase their margins.
Treasuries are sharply higher this morning. It appears that the euphoria of a rate cut has faded and the market has come to the realization that the Fed must see some big trouble under the hood to aggressively cut that much in between meetings.... and we'll have to wait until July or August for the effects of those cuts to really be felt at ground level on Main street.
2 year treasuries are now yielding 1.88%... the market is telling us there is much more to come.
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