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The Fed continues to be more concerned with growth in the economy (rather than inflation), and this became even more evident with its decision to further cut rates in November. The market is once again pricing in a 25 basis point Fed funds rate cut, and possibly a 25 basis point cut in the discount rate for the December 11th meeting -- as a result of more turmoil in the lending industry. We continue to keep an eye on the inflation posture, as a result of high energy and food costs. Luckily, the energy and food markets have stabilized a bit since the last Federal Open Market Committee (FOMC) meeting, which is further putting the spotlight on growth rather than inflation. The trends in several commodity markets are clearly intact, and are pointing to higher prices longer term. For this reason, the Fed decision was not unanimous to cut rates last month. According to Dennis Gartman, editor of The Gartman Letter, the Fed is a creature of habit: Once it starts cutting rates, it tends to continue to cut rates longer than necessary.

Even though inflation is increasing as a result of high food and energy costs, ‘tis the season for shopping! According to the Redbook retail sales numbers that came out last week, consumers continue to shop and that is curtailing some of the markets’ immediate concern of inflation. The most recent Johnson Redbook retail sales report showed that sales increased 2.7% versus +.3% previously. The biggest area of concern in the retail sector appears to be big box shopping though. The market is keeping an eye on the strength of the holiday shopping season. The post-Thanksgiving weekend data was mixed. Consumers made a favorable number of purchases, but are expected to spend less per person than last year. 

Last week, the existing home sales and new home sales figures were released. Both came out weaker than expected. The existing home sales were 4.97 million units sold versus 5.00 million units expected. The new home sales were .728 million units sold versus .750 million units expected. To further add salt to the wound, the previous month’s figures were revised lower for both the new home sales and existing home sales. It is also no secret that the market is expecting the highest numbers of resets to hit the market in the first half of 2008. This is putting continued pressure on the market. Many consumers are looking for a good deal, and may expect to see further housing price pressure in 2008 -- causing potential buyers to look longer. Another factor that could affect the market is the government’s attempt to try to freeze sub-prime rates. The market will be watching any sort of bailout attempts closely. As a result of the weaker housing numbers, it was no surprise to see durable goods orders lower as well. Durable goods orders came out down .4% versus an expected unchanged report.

We are going to be keeping an eye on the trend of non-farm payrolls to further measure the health of the economy. As a refresher, by first glance, last month’s unemployment report came out much better than expected -- with an increase of 166,000 non-farm payrolls. According to Gartman, the report was actually much weaker than expected when further analyzing the details of the report. The increase is part of the "establishment" survey. The "household" survey showed a decline of 250,000 jobs. Gartman believes that the household survey has historically been a much better indicator of the jobs environment. Secondly, with such a large increase in non-farm payrolls, the household number might explain why the unemployment rate remained unchanged last month. The actual unemployment data will be released by the time this article is published. For now, reiterate that Friday’s monthly unemployment report is expected to show non-farm payrolls increase to 70,000 jobs versus an increase of 166,000 last month --which is consistent with a declining jobs trend and weaker. If the trend is declining now, the market will likely be more concerned with further weakness after the holiday season, due to a decline in some seasonal jobs and the unwillingness for employers to cut jobs just before the holidays.

The stock market continues to be extremely volatile as a result of the financial tug of war. The hint of any sort of rate cut continues to be near-term supportive to stocks, because the market views ease of lending practices to be bullish for growth. I have also heard several comments lately that foreign investors view the stock market as a long-term buying opportunity, primarily due to the weaker U.S. dollar allowing foreign investors the luxury of increased purchasing power. In my opinion, the rate cuts might provide temporary relief to the economy -- and most notably the stock market. However, it is questionable as to how it will affect the market longer-term trend. Fed rate cuts are not indicative of a healthy economy. We are also uncertain if further credit crunch surprises exist.

Finally, the current Fed policy has not been friendly to the longer-term outlook of the U.S. dollar. Although the dollar has been rallying the past few days, it is far from making a long-term trend change. Major long-term resistance is approximately 8000 for the dollar index contract. Other countries such as Canada and England have recently cut interest rates, which has supported the dollar index.

Fed Watch:
The market is expecting the Fed to lower the Fed funds rate by 25 basis points, and possibly the discount rate by 25 basis points, at the upcoming FOMC meeting on December 11th.

Technical Update for March Ten Year Notes:
Near-Term Trend: Higher
Long-Term Trend: Higher
Support: 112-26.5, 112-08.5
Resistance: 114-26.0
The longer-term trend is clearly higher. The momentum trend is still pointing higher as the market rallies. Momentum will likely continue to increase going into next week’s FOMC meeting December 11th, and as long as the market believes the Fed will continue to cut longer-term rates.

If you cannot view the above chart, go here. 

The risk of loss in trading commodity futures and options can be substantial. Before trading, you should carefully consider your financial position to determine if futures trading is appropriate. When trading futures and/or options, it is possible to lose more than the full value of your account. All funds committed should be risk capital. Past performance is not necessarily indicative if future results.