Trader’s Narrative

So the Fed came in with a 25 basis point cut, as expected by the markets, and everything went to hell in a hand basket. Hmm, I wonder if you can tell when, exactly, the news came out:

The bond market closes at 3pm, while the equity markets close an hour later. So stocks had one more excruciating hour of pain.

Within less than 2 hours, it had erased almost 4 days of uphill climbing. This is what I wrote a few days ago:

With the impending FOMC decision, traders are going to be twitchy and nervous. Although a 25 basis point cut is baked in, until we get confirmation, the market will probably not trend.

It is all about expectations in the market. Since a quarter point cut was already expected and priced in, the market had rallied accordingly in the days leading up to it. The only thing that would have kick started another rally would have been a half-point cut.

Recession Forestalled?
According to Morgan Stanley, recession may be inevitable now. In a new report written by the bank’s chief US economist Dick Berner (the resident bull) the prime culprit is the credit crunch which has lasted more than 17 weeks and brought the housing market to its knees.

…financial conditions have tightened significantly further as the price of credit has risen and lenders have made credit less available. Money-market rates have risen significantly, and yield spreads over those money-market rates on loans have stayed high or widened.

The bond market has already priced in the next rate cut in January - another 25 basis points. And into the summer of next year, the Fed Funds Futures market is now estimating a federal fund rate of 3.75%.