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Daily Market Commentary

 Today is FOMC decision day. Will it be 25 or 50? May we suggest .375 as a compromise?

 

 

After the release of a scant increase of .6% in Q4 GDP and a weak consumption increase  of 2.0%, the odds favour the 50 basis point cut to 3% in the Fed Funds Rate. The bad news in this morning's numbers was the increase in the Fed's favourite inflation number, the PCE deflator, to 2.7%. The housing sector was the obvious culprit for this weak print and the signs are there pointing to the consumer pulling in his horns.

 

 Of note is the fact that two year Treasuries have RISEN by some 40 basis points in the past week, albeit to just 2.3%, still 70 beeps lower than the new Fed Funds Rate. The yield curve has flattened a little and this all suggests that perhaps the Fed has reached the curve or is about to get ahead of it and that, combined with the fiscal stimulus announced by Washington, could begin to tip the scales in favour of recovery.

 

 So far, the high yield bond market has remained impervious to any of the government bond market developments with spreads remaining at cyclical highs but at least they are not getting worse.

 

 Our finance minister has weighed in on our currency, using whatever moral suasion he can muster to suggest  that he would be happy to see the Canadian dollar trade just below parity. Currency traders will not be paying much attention to this malarkey. The Bank of Canada has ample room to lower rates at its next meeting.

 

Keep an eye on the yield curve; the market is beginning to act differently as it gropes for a bottom. One serious clue will be the US employment report on Friday, always a market moving item.

 



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