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Market Insider/Wednesday Look Ahead

Wall Street's post Fed selloff could spill into Wednesday morning as the Street continues to debate why the Fed didn't deliver more interest rate relief, particularly when it's becoming increasingly glum on the economy.

But wait. Wasn't the Fed expected to just cut the Fed funds rate by a quarter point? That was the majority view, but the Street's minority view that the cut would be more to the tune of half a point, is the one that the market traded on Tuesday, taking the Dow down 294 to 13,432.

The Fed cut just a quarter point from both its Fed funds target rate and the discount rate. The Fed also changed its view on the economy to be more definitive about a slowdown. "Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in the business and consumer spending. Moreover, strains in the financial markets have increased in recent weeks."

However, the Fed may have more tricks up its collective sleeves, says CNBC's senior economic correspondent Steve Liesman. Liesman reported on "Fast Money" that a Fed source told him the Fed is still actively considering a set of tools to address the liquidity issue. The source would not say what the the tools are but that they would consider using them sooner rather than later.

Temper Tantrum

Liesman said in his report it could be the market is misreading the Fed.

Andy Busch, global fx strategist at BMO Capital Markets, described the markets reaction this way in an afternoon note: "With the Fed acting like the parent of a spoiled child, they cut the Federal Funds rate and the Discount rate a miserly 25 basis points that sent the equities into an infantile screaming fit, the US dollar holding its breath and turning red, and the US bond market smiling like a tyke that got the last cookie."

Scotsman Capital managing director Vince Farrell called it: "A bad decision by the Fed to lower the discount rate only 25 basis points." Farrell, a CNBC contributor said in a note that "equally bad was the tentative statement. The risks in my view, are clearly on the downside. I don't know what world the Fed is looking at."

The Dow lost 2.1% Tuesday, while the Nasdaq was down 2.4% and the S&P 500 was off 2.5%. The sell off was the largest since early November. The dollar fell 0.9% against the yen and rose 0.4% against the Euro. Buying in Treasurys pushed the yield on the 10-year to 3.979% and the two-year to 2.960%.

"I think the (stock) market got away ahead of itself to begin with," said John O'Donoghue, co-head of equities at Cowen. "We're down 5-1/2 percent from the highs. Don't forget we had a 10 percent correction."

"From a technical standpoint, maybe they'll just stabilize down here and maybe go side ways. Today there wasn't a lot of volume on the tape so that's not confirmation either way," said O'Donoghue. On Wednesday, "We might get a jiggle to the downside and then stabilize," he said.

Wednesday's Events

Busch says he expects the markets will quickly move on and realize things aren't that bad. "I think they'll be getting decent data for the rest of the week with earnings from Lehman on Thursday the next big equity event," he said in his note. Producer and consumer prices are due Thursday and Friday, respectively and retail sales for November are reported Thursday.

International trade and import and export prices are reported at 8:30 a.m. Wednesday. Oil inventory data is reported at 10:30 a.m.

"Watch US trade tomorrow as it could surprise with a deficit of below $55 billion due to less toys coming in from China. SED statements and China will dominate," Busch wrote.

Treasury Secretary Henry Paulson is in China this week with other U.S. officials. Paulson leads the delegation in the meeting of the U.S.-China Strategic Economic Dialogue (SED). Opening statements take place Wednesday morning Beijing time.

Other events Wednesday include the Goldman Sachs financial services conference in New York.

Bank of America presents. Yum Brands holds its investor and analyst meeting at the New York Stock Exchange.

General Electric Chairman and CEO Jeff Immelt will appear on "Squawk Box" Wednesday. GE, the parent of CNBC, gave its annual outlook Tuesday afternoon, saying it expects profit to rise at least 10 percent in 2008, even with a slowing U.S. economy. GEthough said profits would be $2.42 per share or better for 2008, below the Wall Street consensus of $2.49 per share. "Ten percent is in the bag, we can do this," Immelt told investors. GE is often looked at as an economic bellwether.

Citigroup remains in the headlines as Wall Street analyzes its appointment Tuesday of Vikram Pandit as CEO. Anyone who watches CNBC knows that CNBC's Charlie Gasparino had been reporting Pandit was the frontrunner for the job. Pandit spoke to CNBC's Erin Burnett Tuesday after the market close and told her he will review the company's businesses before deciding what moves to take. He told her the $7.5 billion capital investment made in the bank by Abu Dhabi is just one of a variety of moves Citi will be making.

Financials and the Economy

Speaking of the troubled banking sector, Keefe, Bruyette and Woods made an interesting, and disturbing call Wednesday. KBW's specialty is financial firms. The S&P financial sector, particularly sensitive to Fed news, fell 4.9% Wednesday.

KBW Vice Chairman Thomas Michaud told Maria Bartiromo on "Closing Bell" that the firm expects a recession in the first half of the year and that it cut earnings estimates on 260 financial companies. He also said the firm's expectations for earnings are 17 percent below the rest of the street for the financials.

"It's become pretty clear to them (KBW analysts) that the problems in the marketplace are unfortunately accelerating," said Michaud, who is also chief operating officer. "They also feel there's a significant tightening going on in terms of credit standards by most financial services companies, and the conclusion that they reached is that it's very likely our economy is going to slow more and very likely we think that the economy will slip into a recession in the first half of next year."

Michaud said KBW doesn't usually make macro calls on the economy. "It's very unusual for our firm to have a macro forecast like that. Generally, we are not forecasting trends in the economy but since it's really the companies that we focus on that are in the epicenter of today's concerns we were able to reach that conclusion," he said. Interesting in itself.

Michaud said KBW analysts have been below consensus estimates all year for most of the financial services firms and they've been cutting numbers all year long. One area if concern is that the tightening of standards by lenders will have a direct impact on consumers. "We're nervous about how the consumer is going to behave," he said.

Questions? Comments? marketinsider@cnbc.com

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Senior Commodities Correspondent and Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.