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January 09, 2006
The Employment Report And The Expected Funds Rate Path: Not Quite What I Expected
The holiday last Monday, and the absence of Tuesday data sent our way from the Chicago Board of Trade, made for a short week of prices from options on federal funds futures. Our first snapshot of market sentiment following the release of the minutes from the Federal Open Market Committee's December meeting came on Wednesday, and the vote was clear: Prices were clearly reflecting the belief that the Committee is getting closer to saying enough is enough on the accumulating 25 basis point funds-hike installments.
Given the commentary following Friday's employment report, I was pretty sure we would see more of the same by the week's end. But -- you may want to sit down for this -- I was wrong. The implied probability of a 25 basis point increase in both January and March increased with the news that, on the job creation front, December was worse than expected, but November was a lot better than originally reported. The pictures:
Still, on balance the estimated probability that the federal funds rate is now 50 basis points lower than it will be by March fell over the course of the week. We'll get some influential economic news by the end of this week in the form of the December producer price index and retail sales reports, and there are a fair number of speeches scheduled for Federal Reserve officials. Those may help bring the picture for March into sharper focus. Or not.
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