The economic numbers today indicate the difficulty facing the Fed:
1) Third quarter GDP estimates, at 3.9% (best in 6 quarters!), was well above expectations.
2) October ADP, a read on private sector job growth, surprises on the upside--106,000 vs the consensus of 58,000 and up from a revised 61,000 in September.
Bottom line: economy is still holding up well, despite the housing debacle and $90 oil. Global growth continues to remain strong. So how to justify a rate cut? It gets tougher, but the main argument is that there ample evidence for weakness in the U.S. economy elsewhere and further jitteriness in the credit markets to justify a cut. The good news is that the GDP price index rose only 0.8% annualized, matching a nine-year low.
Most traders would be happy with a 25-basis point cut from the Fed and some language indicating that the balance of risk is tilting toward economic contraction, with some language indicating ongoing concern with inflation.
The worry here is that this will not really be enough; some anticipate this non-event scenario could amount to no change in stocks, or even a brief sell-off. The rally is clearly in a 50 basis point cut, a position held by only about 20% of the people I talked to.
Consumers still charging up a storm. Mastercard blew away the numbers--$2.31 a share, consensus $1.42. Gross dollar volume up 12.8%. Up 8%.
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