Yesterday's 50 basis point cut took the markets by surprise, sending a clear message that the Fed had nailed the coffin on it's inflation bias and was now clearly more preoccupied by the mortgage/liquidity crisis and its potential impact on growth rather than on a possible surge in inflation. Last week's gloomy labor figures and yesterday's weaker than expected PPI release seems to have emboldened the case for more aggressive cuts. On the flip side of the coin the combined effect of the rate cut, oil at record levels and a steadily weakening dollar is bound to raise the risks on the inflation front.
Next in line are the financials sector earnings results which should provide us a clearer picture on the extent of damage from the sub prime crises. Lehman's better than expected results gives reason for hope for the rest of the industry but all this could very rapidly turn sour by just one disappointment. The market environment remains precarious and this is reflected in the high volatility levels.
