From Interest Rate to GDP; A Lovely Road toward an Unpleasant Destination

It is almost certain that the FOMC will lower interest rate today, but what would happen after that?

 

Regardless of what the Fed will do today, I think the market will finally turn its focus toward the GDP and may be more importantly the Personal Consumption; both are to be released as early as tomorrow. The third quarter GDP is expected to show the first contraction since the 2001 recession while the Personal Consumption, the most important driving part of the economy, may show the first decline since 1991.

 

It is important to keep in mind that the figures will reflect the economic activity even before the credit crisis start to intensify from the late September. Since then, central bankers around the world tried to thaw the frozen credit market by reducing their benchmark interest rates; either in coordinated or scheduled meeting.

 

So it may help to see the today's rate cut (if it happens at all) in this context and also remember that the consumer sector is the least responsive component to changes in interest rates. It means that such attempts at best can help to reduce the negative impacts, unemployment specifically, from other sectors on the overall economy.

 

Based on this analysis, I expect that any positive effect from a possible rate cut will finally start to fade as the market find itself closer and closer the GDP numbers.

OPEC Extraordinary Meeting: Missing Signals in a Noisy Environment

OPEC's members gathered in Vienna on Friday to cut production level concerning about oil prices, which has fallen more than 50 percent from its July 147 $/b to about 63 $/b in the last week. However, I was probably wrong for giving it too much weight in my daily assessment.

They finally announced a 1.5 Mb/day cut, when it was almost clear that there would be no cut more than 2 Mb/day and nobody expected to see any significant reaction to such a small cut. In fact, I was too concerned about the possibility of a temporary rally in oil, which didn’t happened at all, and its consequences on the dollar.

I think it worked as a noise, making it difficult to discover signals in the market that otherwise might be very clear. Specifically, and in combination with other factors such as being personally tired, an opportunity was missed for selling sterling at a very cheap price ahead of the U.K. GDP report (see the chart).

However, I made money that night betting on the positive reaction from the Canadian dollar, and I was completely true in closing the position (long on CADJPY) on perception of fading technical signals.

The Power of Sentiment: How analysis could be affected

(Note: This post has been originally written on Sep 30 but added later on Oct 16)

I used to see the market more challenging when market-moving factors become more psychological than fundamental. But recent days showed that such a psychological environment could have at least one advantage by eliminating many factors which in a normal condition should be entirely taken into account.

On Sep 29, everything was based on fear; first because of uncertainty before the House vote on the rescue plan, and second by a sever disappointment from the surprise rejection which finally cost the major indexes more than 7 percent.

And today, Sep 30, it was just optimism from revived efforts by the Congress' members and the U.S. President who are trying to make the market confident that the bill will be eventually passed. And it was when a 3.5 percent decline in Japan industrial production and a 16.3 percent decline in the U.S. house prices – reported by the S&P/Case-Schiller – were unable to prevent the market from a more than 3 percent advance.

Following charts could show that how specific the situation is:
• The prices of oil and gold are highly decoupled (and between Euro and oil as well)
• Oil and USDJPY rise and fall in the same direction (reflecting less effect from oil on the dollar)
• It is also worth to see that the market still react strongly to simple technical patterns