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The world’s central banks announce a coordinated rate cut. The FOMC, just a few weeks ahead of its scheduled meeting, announced a 50-basis point cut in the Fed funds target rate. This was just one of many rate cuts announced across the globe with the ECB also cutting rate by 50-basis points. The Fed is trying to do whatever is possible to get the credit markets flowing freely again. There have been several economic reports for traders to digest as well, along with the weekly data on crude inventory levels.

After several days of talk about the Fed needing to cut rates, the FOMC announced a 50-basis point cut in coordination with the world’s central banks. Much like the $700 billion bailout package, these rate cuts won’t solve the world’s credit problems, but each move is a building block in building back up a strong economy. When the Fed cuts rates, it lowers the rate which banks charge each other for overnight loans. Obviously, the hope is that when the cost of borrowing goes down, more lending will occur. The Fed also announced this week that it will purchase commercial paper.

Another sign that lower interest rates can help spur spending was the release of the pending home sales index this morning. This index rose 7.4 percent during August, pointing to strength in home sales in the months to come. This doesn’t mean the housing sector has bottomed, but it does show that possibly a floor is starting to be built. Obviously, strength in pending home sales shows that there is some lending being done for credit worth buyers, but the fear is foreclosures will snowball, leading the economy into a deep recession. In related news, weekly mortgage applications rose 3.2 percent for the week ending Oct. 3 to a level of 314.5.

Chain store sales in September were weak, although Wal-Mart (WMT) did see same store sales growth of 2.4 percent. The fact is when consumers are concerned about the economy; they tend to buy the goods they need on a daily basis from a discount store. Higher end retailers are seeing weakness with Saks (SKS) warning that earnings will fall short of estimates due to the weak economy. The S&P Retail Index ($RLX) is down about one percent in midday trading after moving higher by nearly two percent early in the session.

Oil prices are below $90 a barrel, down slightly Wednesday as demand forecasts plummet for the commodity. Crude inventory levels rose by 8.1 million barrels for the week ending Oct. 3 with gasoline reserves up 7.2 million barrels. Though not much of a tradeoff, severe problems in the economy is pushing energy prices lower and we should see retail prices at the pumps continue to fall.

On Tuesday, Fed Chairman Bernanke hinted that rates might be cut and sure enough, the FOMC made a move early this morning. The fact that rates were cut in an emergency announcement shows severity of the problems in the credit markets, but also points to possibly further cuts at their scheduled meeting Oct. 28-29. Though we are a long ways from seeing credit problems resolved, there are some in the know that feel they are seeing signs of improvement.

The Fed has already done a number of things to try to improve liquidity and the feeling is they are not finished. Traders are showing a lot of fear right now, obvious by the huge swings we are seeing on the stock market. Economic data will be light this week, but traders will be listening to Fed comments and in such unique times, there could be a huge announcement at any moment.

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

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