A broad consensus has devleoped that the FOMC will deliver 0.25% on the funds rate and 0.50% on the discount rate. The latter move, if carried out, would appear to be largely symbolic, as it would still represent a punitive rate accessible by a limited number of borrowers. Were the Fed to re-invent the discount window as offering liquidity at an actual discount to Fed funds , while at the same time broadening its scope, then we could perhaps call the beginning of the end of the seizing up of short term money markets. Word on the street is that this is highly unlikely to happen, so it could well be the case that tonight's announcement is something of an anticlimax.
The last week or two have seen a reversal of the powerful trends of early-mid November, and it would be reasonable to assume that a 25&50 outcome would prompt at least a fleeting attempt at lower stock prices and bond yields. Certainly that was the bias in last week's poll. It's funny though; is it just Macro Man, or does 1450 seem a lot "closer" than 1550 on the SPX, despite the obvious mathematical fallacy in the statement? Macro Man remains relatively nervous, but he wonders if the apparent proximity of the 1450 level doesn't suggest the threat of a late year melt-up.
Such an outcome would presumably be a surprise to Morgan Stanley, which yesterday shifted its base case US economic call to a mild recession. Macro Man quite likes Dick Berner's work and respects his views, but retains his own expectation for an export-driven muddle through next year. Certainly leading indicators have yet to fall off sufficiently to suggest imminent recession; while the ECRI weekly measure has come well off its highs, the decline is relatively modest compared to 2000-01. Moreover, the index actually bounced quite sharply last week, so weakness clearly isn't one-way traffic.
Elsewhere, we've had (yawn) yet more upside inflation surprises from Bretton Woods II countries this week. Yesterday, Saudi Arabia reported CPI at a record 5.4% (OK, the data only goes back a few years), while overnight Chinese CPI once again exceeded expectations at 6.9%. As the chart below indicates, this is the highest in 11 years. While food prices remain the principal explanatory variable, the recent rise in administered fuel prices has taken non-food inflation to 1.4%.
Macro Man has noted that pressure on BWII is likely to be one of THE macro stories of 2008, and was gratified to see that Deutsche Bank, whose chief economist was one of the authors of the original Bretton Woods II paper, has published a piece this morning noting strains on the system. Even at current pricing, Macro Man thinks that GCC currencies like the AED offer a nice option-like payout on the erosion of BWII. With the Fed likely to apply pressure on regional central banks by trimming rates again tonight, it may soon be game on once again for the performance of regime change trades.