some rate cut follies commentary...
"October 30, 2002
Is Worse Actually Better? Some in Stocks Think So
By JONATHAN FUERBRINGER
http://www.nytimes.com/2002/10/30/business/yourmoney/31PORT.html
How perverse is the stock market? There was a hint of perversity yesterday and, maybe, there will be more evidence later this week when investors see the October jobs report and a key manufacturing index.
The perversity is the sense that some investors think it might be better for stocks if the news in these two economic reports on Friday is worse than expected. Why? Because two weak readings might force Federal Reserve policy makers, who meet next Wednesday, to cut the central bank's benchmark short-term interest rate a quarter point to 1.50 percent.
"I do think that weak economic numbers this week will cause the Fed to cut interest rates on Wednesday and I would expect the stock market to react positively to that," said Joseph Liro, an economist and market analyst at Stone & McCarthy Research Associates.
The bond market is usually perverse, as prices rally when the economic news is bad and investors figure this will send interest rates lower or, at least, keep them from rising.
That was the bond market response yesterday when the Conference Board reported that consumer confidence in October plunged to 79.4. That is the lowest level since 1973 and the 14.3 point decline from September's level of 93.7 was far more than Wall Street analysts expected. The consensus forecast was for a fall to 90.
The price on the Treasury's 10-year note jumped while the yield, which moves in the opposite direction, dropped to 3.94 percent, from 4.09 percent on Monday.
Stocks, however, fell after the 10 a.m. announcement, which would be expected given how important consumer spending is to the health of the already anemic economic recovery and the outlook for corporate earnings. The Dow Jones industrial average fell 90 points in the next 12 minutes, paused, then plunged an additional 80 points.
But the Dow bounced all the way back to finish the day up 0.90 points, hinting that some stock investors think some more bad news now might be good for them next week.
On Friday, based on current Wall Street forecasts collected by Bloomberg News, the government is expected to report that no new non-farm payroll jobs were created in October, following a 43,000 decline in September. The Institute of Supply Management is expected to report that its manufacturing index slipped to 49 in October, from 49.5 in September. A reading below 50 means that the manufacturing sector is contracting.
To have an impact, however, the jobs and manufacturing reports have to be worse than expected, just like the consumer confidence data was.
How much worse than the consensus could the jobs and manufacturing data be? The worst forecast of the 62 economists polled by Bloomberg is for a decline of 75,000 jobs. As for manufacturing, the lowest forecast among the 60 predictions is 44.
The problem when stock investors are hoping for a rate cut from the Fed is that they can be easily disappointed. A report on Friday that nonfarm payroll jobs fell 15,000 and that the manufacturing index dropped to 47.5 might prompt an immediate sell-off of stocks that was then limited by the rising expectations of a rate cut on Wednesday. Yet Fed policy makers could still hold rates steady because they want to see more data and be more sure how much trouble the economy faces before they use one of the few rates cuts they have left.
Such a disappointment would surely send stocks lower.
Yet even before the delivery of Friday's reports, many investors have already jumped into the rate cut camp, although expectations for a another rate cut have swung widely since the last meeting of policy makers in September. Two Fed policy makers dissented in favor of an immediate rate cut when the majority left rates unchanged in September. That dissent raised expectations until other Fed members dampened hopes by saying interest rates were low enough already. Now comments from Fed members in recent newspaper accounts has lifted expectations again.
At the close of trading yesterday, the plunge in consumer confidence had upped the odds for a rate cut, as measured in the futures market. The yield on the November futures contract on the Federal Funds rate, which is the Federal Reserve's benchmark interest rate, was at 1.58 percent. This means that investors are betting that there is a 68 percent of a quarter point rate cut next Wednesday. That is up from 48 percent Monday and 18 percent a week ago Tuesday.
But investors think the odds are even better for a rate cut in December, when Fed policy makers meet for the last time this year. Based on the December futures contract on the fed funds rate, the odds for half of a percentage point rate cut are now 63 percent, up from 47 percent on Monday and a 19 percent chance a week ago Tuesday. A quarter point cut is a virtual certainty, according to these odds.
"The murmurs coming from unnamed Fed officials in recent days are consistent with our expectation for more easing ahead," said David J. Greenlaw, chief United States fixed-income economist at Morgan Stanley, in a note to clients.
"A rate cut at the Nov. 6 meeting," he added, "is possible if the economic data released at the end of this week are softer than anticipated."
However, he warned that a half a percentage point rate cut in December "still seems like a better bet."
If he is right, investors may be happy in December but very disappointed next week."
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