Jobs For Everyone!

Posted by John Carney, Oct 05, 2007, 9:12am

A couple of times we've mentioned that many financial markets have been behaving as if August never happened. Well, in many ways it didn't. The Fed reversed the August 7th decision on interest rates. The quant funds reversed polarity and returned to warp speed. The huge hedge fund redemptions weren't. And now that negative jobs number has been taken back. Turns out we gained 89,000 instead of losing 4,000.

Well, you know what else isn't happening? The October rate cut. The oddsmakers in the sport of Fedlinlogy--the folks who trade Fed fund futures--are now betting against a rate cut at the end of this month.

But don't worry. The folks who think the Fed always needs to cut rates will find a way to ignore the new jobs numbers. They were government jobs, you see. Teachers and such. And those don't count. These are also the folks who tell you there's no inflation. Ever.

Update: In the comments section, a hard working reader thinks we're reading the rate cut signals wrong! Make up your own mind.

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Posted in: Economic Indicators

Comments

Posted by Kang, Oct 05, 2007 9:46AM

Jobs for some, miniature American flags for others!

Posted by , Oct 05, 2007 10:59AM

"The oddsmakers in the sport of Fedlinlogy--the folks who trade Fed fund futures--are now betting against a rate cut at the end of this month."

What are we, a bunch of unemployed daytraders who learned everything from Tim Sykes's new book?

First of all, it's pretty useless to claim that the market is "betting against a rate cut." The real question is, what PROBABILITY the market is assigning to a rate cut. Current implied probabilities from Fed Funds Futures are: are 46% probability for 4.50% Fed Funds rate (25 bps rate cut) by October 31, and 54% probability for rate of 4.75% (no change) by October 31.

You should have also mentioned that using Fed Funds Futures to calculate these probabilities has severe limitations and is not as accurate as using the Fed Funds options or binary options to compute implied probabilities.

Based on the options market, the implied probabilities of Fed Funds rate by October 31 are:

Rate, Implied Probability
4.25, 9.4%
4.50, 53.2%
4.75, 37.4%

Based on the binary options, the numbers
are:

4.25, 13.1%
4.50, 45.90%
4.75, 41.00%

Furthermore, the mean economist estimate of the Fed Funds rate is 4.59% by October 31. The median estimate is 4.50% (25 bps cut) by October 31.

So more accurate market calibration models indicate that the market is assigning a HIGHER probability to a 25 bps rate cut on October 31, versus no rate cut. In layman's terms, Mr. Market is betting ON a rate cut (not AGAINST, as you claim). Furthermore, economist are also estimating a rate cut.

The only reason I took the time to spell all of this out is that so that in future you might take the time to understand what you are reporting on and then report the facts fully and in an objective manner (instead of politicizing and sensationalizing the issue as you have done here).

Posted by anon 2, Oct 05, 2007 11:09AM

@10:59, the options figures you stripped from Bloomberg are using last night's closing values. The only one which is live (and therefore more accurate given the NFP print) are the futures

Posted by , Oct 05, 2007 11:18AM

anon2, er ... yes you do have a point.

But I don't think that futures have moved that much from yesterday's close. Also, I think that the last time the futures were at the current level the options were still favoring a rate cut. I'm willing to bet that the options will still favor a rate cut at the close today (or will be even odds at best), despite the NFP, but that's speculation. Besides, the futures calculation is so unreliable that even the live feed aspect of it doesn't really override the option-based estimate (in my mind).

Posted by anon, Oct 05, 2007 11:19AM

Nerds to the left of me douche bags to the right....

Posted by , Oct 05, 2007 11:38AM

Where in bloomberg did you get those numbers
teach me plz

Posted by anon2, Oct 05, 2007 11:44AM

looks to me like they moved - and this is for you 11:38. Type FFIP, select Futures, click on the bottom tab that says "Historical Implied Probability".

Posted by anon2, Oct 05, 2007 11:55AM

yesterday, the implied prob of a cut was 72%, now its 48%. @11:19, I better not be the douche, jackass

Posted by dopey daytrader who makes more than unemployed Ivy Leaguers, Oct 05, 2007 12:18PM

so........all you super smart, run the world folks are saying is that implied prob of a cut is 48%....so, its maybe, maybe not.......flipping a coin gives the same result, without the hassle of listening to you.....oh yeah, I forgot, you unemployed Ivy Leaguers dont have coins to flip....

Posted by , Oct 05, 2007 1:44PM

dopey, bitter much?

Posted by dopey daytrader, Oct 05, 2007 2:03PM

Used to be, until I realized my firm's quarterly bonus' exceeded what Tier 1 yearly bonus' are. So, now, I think its pretty funny when you 'rule the world' types talk and talk, then go home to your Second Ave apartments, while I live off Park in the 70s.

Posted by , Oct 05, 2007 2:12PM

dopey, how do you figure that you're a daytrader if you have a real job? Or by "firm" did you mean something like Swift Trade?

Posted by dopey, Oct 05, 2007 2:41PM

Used to work on the floor, traded it in with a few guys to run our own dough. We clear GS and LEH if that answers your question

Posted by , Oct 05, 2007 2:51PM

dopey, oh so you're a Vinney. "Daytrader" is usually taken to mean "individual daytrader" .. i.e. a clueless, hyperactive retail investor with an etrade account.

Posted by dopey, Oct 05, 2007 4:23PM

haha, not a Vinny at all - you call it hedgie, I call it day trader - GSs' of the world are little more than daytraders - some of us make money, most of you 'rule the world' guys dont......

Posted by knight raider, Oct 05, 2007 4:30PM

I'm a night trader

Posted by , Oct 05, 2007 6:15PM

Alright so FFIP for 4.75 is now 60% based on the binary option. I was completely wrong. I would fire myself at this point.

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