Tuesday, February 05, 2008

ISM Report Points To More Weakness In The Economy

The markets were set to open only slightly lower, but the ISM Services report that came out this morning was much weaker than expected. It showed the first contraction in business services in nearly 5 years. This hit the market, and the selloff picked up steam.

The fed funds futures increased the probability of another 50 basis point cut at the next FOMC meeting to 100%. The odds of recession have certainly gone up on this report. I have been of the opinion that there is probably only a 50/50 chance of recession, given strength in other parts of the economy. But now I might have to raise those odds.

I am also hearing more chatter about retesting the lows from January. While I have been talking about this for a while, it seems it is now becoming consensus. While the consensus is often wrong, if everyone is waiting to see if this happens, it could become a self-fulfilling event.

Asian markets were lower overnight, and the int'l ETFs are all lower today. I am considering hedging some of my international exposure with an inverse ETF.

Oil is also lower, nearing $88. This is a reflection of weaker economic growth, and is taking the energy complex lower. The 10-year yield is down 10 bps to 3.54%


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