Market Cheat Sheet: Responding to new data

This is circulating via email around trading desks:


Cheat sheet: reacting to data and market releases

weak data =  Fed ease, stocks

consensus data =  lower volatility,
stocks rally

strong data =  economy
strengthening, stocks rally

bank loses $4bln = bad news out of
the way, stocks rally

oil spikes =  great for energy
companies, stocks rally

oil drops =  great for the consumer,
stocks rally

dollar plunges =  great for
multinationals, stocks rally

dollar spikes =  lowers inflation,
stocks rally

inflation spikes =  will inflate all
assets, stocks rally

inflation drops =  improves earnings
quality, stocks rally


very funny!

(Thanks Peter!)

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Thin Trading: Fed Fund Futures and Antique Watches

Yesterday, Traders embraced the release of the FOMC minutes. Indices were flat up until just before the 2:00pm release, and then took off, with the Dow gaining near 1%.

The thinking behind the Fed action was clearly revealed in that release. The emphasis was on the subsequent impact of credit on the entire system. The WSJ reported:

"Federal Reserve officials worried that credit-market
turmoil could reinforce slower growth at a time of "particularly high
uncertainty," leading to their half-point interest-rate cut last month,
minutes from the meeting show.

Without a cut, there was concern that "tightening
credit conditions and an intensifying housing correction would lead to
significant broader weakness in output and employment," the
rate-setting Federal Open Market Committee said. The minutes, released
yesterday, also showed members worried that market turmoil "might
persist for some time or possibly worsen."

They offered no clues about
the direction or timing of the Fed’s next move."

That last sentence is quite intriguing. Understanding whether or not a rate cut is forthcoming impacts yields, stocks prices, etc.

Given the significance of the Fed’s action, one would suppose that the markets which trade the Fed Futures would be, if not prescient, than at least telling about their future price action. One of the more fascinating aspects about this, however, has been the way the Fed Fund Futures have functioned over this time. They have been wildly wrong, forecasting an imminent rate cut since January 2006. I thought it might be instructive to look at why this maybe so, and what it might mean . . .

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Category: Credit, Derivatives, Economy, Federal Reserve, Inflation, Markets