Today's Market Commentary

Still benefitting from perceived economic softness and echoes of Fed Chairman Bernanke's words, bond prices rose on Friday and expectations for Fed easing soared. While the 11-14bp drop in short and intermediate term Treasury yields was big news, the decline in Fed Funds futures' yields was even more impressive and surprising. This morning, Treasuries are giving up some of the ground gained on Friday but Fed Funds futures continue moving lower in yield. The Fed Funds futures' February contract is now trading at 3.64%, 61bp below the current target rate. The May contract is trading at 3%, 125bp lower than the current target despite the fact that there are only three FOMC meetings between now and late June. Clearly, Bernanke's comments along with the economic fundamentals are prompting the market to expect the Fed to ease aggressively, including either intra-meeting moves or 50bp (or greater) moves. Over the weekend, the New York Times reported that consumer spending is falling sharply. The article notes spending cutbacks across the income spectrum and that "Such a decline would be the first since 1991, and it would almost certainly push the entire economy into a recession in the middle of an election year." This week will be a very, very busy one with a packed economic calendar and countless earnings announcements on-tap. While it is a given that many earnings announcements will feature big write-downs, the real question is whether deterioration is continuing and economic weakness spreading.

NY Times article link: http://www.nytimes.com/2008/01/14/business/14spend.html?_r=1&hp&oref=slogin

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