The week before a Fed meeting is usually one of low volume, volatility and relative calmness in the S&P and overall financial markets. The week before a Fed meeting during contract rollover (March – June as the front month) is usually one of extremely low volume, volatility and calmness. However, this week we’ve seen exceptionally difficult and choppy trading conditions. Funds & institutional traders seem to be posturing for the March 18th meeting.
This week in the E-Mini’s we opened relatively unchanged from last week at 1292.00, lost a bit of footing on Monday and Tuesday, most likely due to the negative jobs report last Friday. The employment report showed losses of 63,000 jobs in Feb, which was the second month of consecutive declines.
On Wednesday the 11th, to the shock of most traders (myself definitely included), we saw the biggest intraday rally in the last 4 years – a move from opening range of 1276.00 rallying to close on the highs at 1324.00.
Truthfully, I’m very nervous for what’s going to happen next week (Tuesday March 18th) when the Fed meets to discuss interest rates. The futures markets have already priced in at least 0.5-percentage point cut in the target rate. According to fed funds futures, there is close to a 90% probability of a 0.75-point cut. I’ve even heard whispers of a full point cut, but these whispers were probably generated from the same people who told me to watch for a surprise cut last weekend.
The main rate has been lowered by 2.25 percentage points since February, down to its current 3%. At the other end of the spectrum, the European Central Bank’s rate is at a six year high of 4%. ECB inflation is also at 14-year highs.
There are so many factors to consider regarding the interest rate cut, I’m certainly not envious of any decision makers at next week’s meeting. If the Fed lowers too much, the dollar will get crushed and hard commodities like Gold ($1,000/oz this week) and Crude Oil ($111/barrel) will rally to treacherous levels. In a flight to quality move, all commodities should rally based on the weakness in the dollar and commodities resilience as a hedge for inflation.
And interest rate cut will be made to prevent recession. Interestingly enough, according to the Wall Street Journal’s latest economic-forecasting survey, 71% of forecasters consider the U.S. is already in a recession!
My thoughts on how this will play out are mixed. Bernanke and Co. has been more reactionary than forward looking the past year. Looking ahead and seeing that a big rate cut would destroy the U.S. dollar doesn’t seem to be an option at this point. Never mind that it’s trading at all time lows versus the Euro and 10 year lows against the Yen. Parity in all the currencies seems to be a foregone conclusion at this point.
Friday morning brought us favorable news in the Consumer Price Index . CPI or “Headline Inflation” is one of the most frequently used statistics for identifying periods of inflation or deflation. February CPI was released as unchanged, rallying the market to weekly highs at 1327.00. I have mixed feelings about this report. Because large rises in CPI in a short period of time represent inflation, this report may give a little bit of relief to all the inflation fears, and make the Fed’s job on Tuesday all the more difficult.
Another HUGE issue is Bear Sterns. Early Friday, Bear Sterns reported significant liquidity issues and JP Morgan announced it would be providing short term financing to the embattled brokerage. Liquidity issues shook the markets and the ES sold down to 1279.25 on this breaking news.
So – how do we trade around the Fed meeting, Bear Sterns and the subsequent market movement and fallout? I’m a contrarian at heart and I do believe it will get worse before it gets better. In this fickle market, it seems like we’ll need a full point cut for the bulls to even get their chance at a extended rally.
I believe the Fed will cut 50 and we’ll test the 1260 level because the move will be immediately interpreted as not enough of a decisive move. Somewhere on the way down, the market will get smart and realize – maybe less of a cut is a good thing. Maybe the inflation problems in the Earlier in the week the Fed announced it would lend $200 billion to primary dealers in exchange for mortgage-backed securities. It’s obvious the Fed is trying to avoid having to make a huge rate cut in order to prevent recession.
Use proper risk management when trading. For specific levels and opinions, please contact me.
Josh Russo
Alternative Investments
Peak Trading Group
A division of Rosenthall Collins Group, LLC
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Past performance is not indicative of future results. The information contained in this report is intended for informational purposes only and is the opinion of the writer and may change at any time. This information was compiled from sources believed to be reliable but accuracy cannot be and is not guaranteed. There is no warranty, expressed or implied, in regards to this information for any particular purpose. There is significant risk involved in trading futures and or options on futures and may not be suitable for all investors. Investors should consider these risks and evaluate their suitability based on their financial conditions. This information is provided freely and is not in the capacity of a trading advisor.
