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Forget The Fed; Watch Friday
Fed-watching has become a national pastime.
There are worse ways to spend time. At least the Fed doesn't go out on strike. Fed-watching is a good replacement for baseball; it beats daytime TV, the Simpson Network, and Bosnia; and it's certainly more productive than watching the stock market.
Also, working at puzzles helps to keep the mind sharp. Religious deconstruction of the wit and wisdom of Alan Greenspan may save you from spending your golden years making wallets at Happy Acres.
The Fed is to meet on July 5 and 6, and the press is hyping the outcome the way it used to push a pennant race. Will the Fed ease, or stay put? How will the markets react to the decision? What will happen to mortgage rates?
In order, the answers are: it doesn't matter; it depends on Friday; and it depends on Friday.
The Fed will ease; if not this month, then next. Whenever the Fed does get around to easing, short term rates like "prime" will fall, and nothing else will happen. A series of Fed rate reductions are required to boost an eight trillion dollar economy, just as the Fed needed seven separate tightening moves over a year's time to achieve the current slowdown.
The only available surprise would be a big move down -- more than a half percent -- which might cause mortgage and other long term rates to rise. This perverse reaction came clear in an interview with a leading bond ghoul. Do you think the Fed will ease? "I sure hope not. If the [deleted] do, I hope it's only a [deleted] quarter." Explain, please? "If the [deleted] ease too [deleted] much, the [deleted][deleted] economy will get going too [deleted] fast, and then [deleted] inflation will come back." Most helpful. Didn't repeat himself once. The "quarter" referred to is a token .25% drop in Fed funds, as opposed to a [deleted] .50%.
What's this "Friday" stuff about markets and mortgages? On the first Friday of each month at 6:30am Colorado time the Labor Department releases job market statistics for the preceding month.
Resist your temptation to snore. All the pinstripe and cigar conspiracies sound exciting, but the real time, right now event is the economy, not the Fed. The Fed moves with the glacial progress of a Greenspan sentence, while the economy moves at the electronic lightspeed of news.
On the first Friday of each month at 6:29:55, financial screens go blank all over the world. Tokyo to Frankfurt, Capetown to Chicago, Hong Kong to London, nobody wants to have a trade in process, or a price promised when the American Labor Department releases its data at 6:30. Depending on the magnitude of the surprise, screens may stay blank for several seconds until the first trader has the courage to offer to buy or sell.
The unemployment rate is the part of the report which always gets the biggest press play, but the markets could care less. The markets understand that politicians are embarrassed by unemployment, and so long ago cooked those books to porridge for political self-protection.
Markets care about the net change in "non-farm payrolls" (farm payrolls are too volatile to include). The payroll report is important for two reasons: it is fresh, as it covers the immediately preceding month, and it has a near-perfect correlation for the future of inflation and the economy.
The last two "first Friday" reports caused mortgage rates to drop into the sevens (note that the Fed hasn't done anything since January, when mortgage rates were in the nines). On May 5, markets expected a gain of 250,000 jobs, and got a decline of 9,000. Mortgage rates fell from 8.75% to 8.25% in two days. On June 2, forecasts called for a 100,000-job gain, and got a 100,000-job contraction, which took mortgage rates down to 7.50% in two minutes.
I don't mean to take the pleasure out of watching the Fed soaps on Wednesday and Thursday, but for excitement, tune in CNBC on Friday morning. The pre-release tension starts about 6:15, complete with analysts and an on-screen reporter standing at the door of the Labor Department waiting for the report. If payrolls did something strange in JuneÉ. Live! From New York! It's bond market showtime at 6:30:01!
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