Fed Spurs on Year End Rally

Wednesday, November 23, 2005 | 08:31 AM

The market’s technical picture has continued to improve. Rallies have been on decent breadth and improving volume. The Bullish Sentiment percentage is now over 50% - high, but not excessively so. Seasonal factors have also arrived just in time, as year-end contributions to tax deferred accounts have seen healthy inflows. Fund managers eventually put this cash to work as equity buys.

The biggest negative factor now seems to be overseas capital flows have been at records recently. These buyers have, in the past, been reliable contrary indicators.

But the newest factor supporting the year-end rally may be the Federal Reserve: While they made their obligatory Hawkish Inflation comments (“Upside inflation risks are the key concern”), the most recent minutes reveal quite a few elements that are intriguing. There seems to be a variety of Fed voices straining to be heard. Will Fed Chair-elect Bernanke inherit a uniform Fed, as Greenspan enjoyed? Or, when he takes of the central bank on January 31st, will there be some dissension in the ranks?

Regardless, the Fed Minutes had some bullish implications:

· Future Policy 'Increasingly Sensitive' To New Data;

· Outlook Statement Must Change 'Before Long';

· Some Members Warn Of 'Going Too Far' In Tightening;

· US Econ Growth At 'Solid Pace' Despite Hurricanes;

· Gov’t Spending To Boost Econ Growth Near-Term;

(Source: Dow Jones)

Whether this was just so much pre-holiday jawboning, or a signal of a significant change in direction, these comments are most definitely of interest to traders.

Also worth noting: The coordinated approach of other central bankers: Japan’s Prime Minister has been pressuring the BOJ to hold off on tightening monetary conditions. At the same time, European Central Bank Governor Jean-Claude Trichet has apparently backed off his prior implied series of rate hikes. Implied is Euroland monetary policy may be a “One and Done” approach. This was echoed by ECB governing council member Guy Quaden: “What we have to do is to take our foot somewhat off the accelerator pedal. The question is not, for the time being, to step down on the brake pedal.”

It appears that Central Bankers are coordinating their approach to global econ-management.

The question for Fed watchers is how Greenspan might set up the Fed for his successor. He could hold off hiking rates in January, giving Bernanke a chance to show his inflation fighting chops? Or, will he allow the new Fed Chief to skip a hike in the March ‘06 meeting, based upon an inflation target?

There will be plenty of data between now and then.

Wednesday, November 23, 2005 | 08:31 AM | Permalink | Comments (1) | TrackBack (0)
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Barry, from Market Soapbox 11/22

http://naybob.blogspot.com/2005/11/market-soapbox-112205.html

The markets interpretation was that the Fed was considering changing its statement language (by removing the term "measured") and that pausing early next year, may be in the cards. As usual, most of the spin doctors and markets missed the important points.

"The outlook continued to be for core inflation to pick up modestly over coming quarters owing to the lagged effects of higher energy prices... Manufacturing capacity utilization dropped substantially in September... however, underlying economic slack was likely quite limited."

In other words, the fed expects core inflation to pick up near term and the underlying slack (i.e. the output gap or difference in what we can produce vs. what we are producing) is quite limited or narrow.

Limited slack means that if there is a further increase in demand, price inflation will ensue. This could trigger more rate increases at higher levels (i.e. 50 basis point, rather than the measured 25 bps) and would necessitate the removal of the term "measured".


Posted by: The Nattering Naybob | Dec 1, 2005 8:27:56 PM

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