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Bernanke's "Put" Speech And The Markets-Update
Update: [URL]http://www.forexfactory.com/news.php?do=news&id=44944[/URL] This could turn into one of the best trades you may have, if the markets percieve that a clear indication on the fed's next move is given in Bernanke's speech.The topic at Jackson Hole could not be more appropriate: housing and monetary policy. Markets are looking for a "put"-meaning word of a rate cut that could help to save the situation-much as they once looked for a "Greenspan Put". While the fed has indicated in letters to Senators Dodd and Schumer that they are prepared to take whatever steps are necessary, markets will be hanging on every word and phrase. Bernanke will likely reiterate that the housing sector is in a protracted slump that is proving to be longer and deeper than had been expected. That kind of language has already been seen in the last statment when they said that the risks to their growth projections had increasd "appreciably". What exactly does "appreciable" mean? I found an interesting piece of information on the Economist.com website that may shed shed some light. They reported that a simulation by economists at UBS suggests that "the combination of a credit shock (which they define as an increase of one percentage point in the cost of capital), coupled with drops of 10% in both share and house prices, would drag America's output growth down by 2.6 percentage points next year, in effect pushing the economy into recession". The problems may go even deeper though. The study goes on to state that, "even with lower interest rates, America's growth rate could slow by more than a percentage point next year". The solution to the economic situation likely goes beyond what the fed can do by itself. Probably a combination of easier terms in present mortgages (as suggested by Senator Schumer), government loan garuntees (meaning goverment issued debt sold on the open market) and easing of monetarty policy will be needed to fully address the problems that exist today. Nontheless, if the market percieves that a cut in the overnight rate is the fed's intention, equities and carry trades will take off. That means that as pairs like the GBP/JPY and EUR/JPY appreciate the dollar will weaken vs the high yielders and gain on the Yen. You will also see a steep jump in bond yields all across the curve. And if the market percieves that a cut in the overnight rate is not the fed's intention, you can expect to see equities and carry trades sell. Pairs like GBP/JPY and EUR/JPY will fall as the dollar gains on the high yielders and loses value vs the Yen. Bond yields will fall sharply as they're bought in the flight to safety. Less clear is how the market will react if another cut in the discount rate seems to be the only intention, although the market got a big boost in the few days after the discount rate reduction on August 17. My judgement would be that anything short of a cut in the overnight rate will be greeted with a great deal of disappointment by market participants. We could also see markets jump on a YoY PCE reading that falls into the fed's 1-2 percent target range as this will indicate the possibility of a rate cut however, it seems likely that markets will be waiting to hear from the chairman himself. Because of thinner volume and higher volitility, I would be very careful about entering any trade prior to the speech. Thanks for reading my post and please use the box an the left to vote. If you're interested in finding out more about my trade room, blog and trading primer contact [email][email protected][/email] Jackson Hole, Wyoming
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