Economic Watchdog, Nov. 16

Bloomberg reported that GS sees $2 trillion cut from the amount available to loan globally due to the problems in the credit market. The company feels leveraged investors will need to scale back the loans they offer to bring their capital ratios in line. The fear is that this sort of cut in available credit could send the U.S. economy into a “substantial recession.” Though there are a lot of uncertainties about how much lending will be scaled back, we still need to understand the possible risks.

Industrial production in October supported the view that the economy is slowing. Production fell by 0.5 percent when a slight gain was expected. However, this data doesn’t seem to coincide with regional manufacturing reports that show expansion. Of course, the industrial production data is a bit dated, but is something the Fed will digest as well.

Another major concern for economists is the rising price of energy. On Friday, the December crude contract rose $1.67 a barrel to $95.10. The January contract, which becomes the front-month contract after Friday’s close, was up $1.77 to $93.84. On Thursday, crude prices fell following a surprise increase in weekly inventory levels.

Federal Reserve Governor Randall Kroszner spoke this morning and his words hinted that the Fed was done cutting rates for the time being. Mr. Kroszner noted that current monetary policy was appropriate for the “rough patch” expected in the economy. He also stated that the Fed is concerned about how high energy prices will impact prices on a broader level.

The fact is that the Fed has cut rates by 75-basis points in the past few months. Cuts take time to bleed into the economy, which means the committee will be patient, especially with pricing pressures still above their comfort level. Fed fund futures are pricing in about even odds of a rate cut at the Dec. 11 meeting. Of course, data released between now and the year end meeting will be a major factor in what the Fed will ultimately do.

Next week’s calendar will be light, mainly due to the Thanksgiving Day holiday on Thursday. However, data on housing starts and the release of the FOMC minutes Tuesday will likely draw a lot of attention. Of course, oil prices will also remain in the spotlight going forward.

Jody Osborne
Senior Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site