Well, just hours after we publish our report, Consumer Credit comes out significantly below consensus forecasts.

The results for September show that consumer credit shrunk considerably at $3.7B from the previous month's (upwardly revised) $15.4B.

There are two possible conclusions that we can draw here:

1. consumers are spending less

2. consumers are borrowing less

3. both.

I suspect that higher interest rates will slow both consumer spending and borrowing rolling forward--neither of which would be particularly bullish for consumption rolling ahead.

You can thank the whizzes over at Bloomberg for that one.

And for good measure, I've attached the most recent reading on the fed funds implied volatility screen. Markets continue to press for further rate cuts, with FFF's now pricing in a 70% chance of a 25bp move.

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New speech from Ben Bernanke to the US Legislature:

http://www.federalreserve.gov/newsev...e20071108a.htm

Further reactions to come on the dailyfx.com calendar from John Kicklighter within several minutes.

Wow. Despite Ben Bernanke's fairly stern warning on price pressures, markets have really increased bets that the Fed will cut rates on December 11. Whether or not this is well-advised is questionable, but speculators have clearly spoken, and such developments can only hurt the dollar further against major forex counterparts. The Fed Funds Futures December contract now shows a 92% chance of a 25bp cut to 4.25 percent.

Market is clearly trying to force the Fed's hand. I think there will be some weeping and gnashing of teeth come the December meeting:

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From Thompson IFR....

Thursday, November 08, 2007 2:28:00 PM

WASHINGTON (Thomson Financial) - What Federal Reserve Chairman Ben Bernanke was trying to say to Congress today, and what the financial markets heard, were not quite the same thing.

Bernanke stuck determinedly to the neutral policy bias of the Fed's October 31 post-meeting statement, that downside risks to growth are roughly balanced by upside risks to inflation.

'The length of time spent on economic problems implies that the Chairman did not intend to alter the markets' expectation for further Fed ease,' said Brian Fabbri at BNP Paribas. But, 'after assessing his testimony the market raised the probability for Fed ease in December.

Bernanke's appearance before the Joint Economic Committee was largely a non-event for stocks and bonds. There were 'no clear hints of further rate cuts,' said BMO Capital's Sal Guatieri.

There was a reaction in implied expectations from fed funds futures which by mid-afternoon suggested that a quarter-point interest rate cut is a certainty in December, and that a half-point cut is more than likely. The implied expectations gave the quarter point cut 87 pct odds late Wednesday.

Some analysts saw a similar slight dovish tilt to Bernanke's testimony despite his attempted neutrality. He 'leaned on the dovish end of the monetary policy,' said Tony Crescenzi at Miller Tabak. 'Bernanke's dovish leaning is apparent in his emphasis on the downside risks to economic growth relative to the upside risks he expressed on inflation.'

The Fed's economic forecast expects 'that the growth of economic activity would slow noticeably in the fourth quarter from its third-quarter rate,' Bernanke repeated. And growth would be remaining 'sluggish during the first part of next year, then strengthening as the effects of tighter credit and the housing correction began to wane.

Bernanke said the Fed fully recognized the threats from the falling dollar and rising oil prices. But, 'these inflation risks were hanging over the economy through the past few years,' said Stephen Gallagher at Societe Generale. 'They remain medium to long-term risks.'

And despite those risks, the Fed chairman said inflation would be 'in a range consistent with price stability next year.'

According to Fabbri, 'that forecast suggests that the FOMC has a tilt toward economic weakness.'

Several analysts gave Bernanke good reviews for his performance before Congress and the cameras, even if he lacked some of the theatrical qualities of his predecessor.

'In a nutshell,' said Harm Bandholz of UniCredit, 'Bernankes testimony has something for everybody -- downside risks to growth, upside risks to inflation and ongoing financial market turmoil. We expect the Fed to stay on hold in December - stay tuned.'

Something for everybody was, in a nutshell, what Alan Greenspan usually left his audience with as well.

And what about the odds of a 50bps move? Isn't that unreal? Hah!

Forbes article certainly has a different take than the market...

http://www.forbes.com/business/2007/...w_1108fed.html

I would tend to agree with the text in that Forbes article, and not so much the markets at this point. I hesitate to say that speculators are in for a nasty surprise, though. We've been saying that all along and we've been the ones that have been proven wrong by the Fed's rate moves.

The more I think about it, the more I believe that there is no way the Fed can cut in December. True, we've been rooting for neutral policy all along, but I'm completely convinced this time. While FFFs have not been persuaded by rationality (see attached chart), we could easily see these probabilities shift ahead of the actual meeting. The Fed has about a month to attempt to set the stage for no policy change...let the show begin.

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We updated the "Watch what the Fed Watches" article on DailyFX. Junk-Treasury spreads have soared, along with credit default swaps and the Treasury-Eurodollars spread. Things look pretty bad for money market and credit conditions.

On an unrelated note, I happened upon this commentary from the former head of the Mortgage-Backed securities desk at Citi. Most interesting stuff in in bold.

I really liked that article, David, and to me it was an extreme pessimists' outlook. (would be nice to think that he'll be wrong!)
So does this mean "damned if they do, damned if they don't?"
I've been reading arguments both for and against the FED dropping rates in Dec, and neither paint a very rosy picture for Q4 or Q1 and Q2 housing. But the general growth is to be moderate and not recessionary.
So unless you take the stance "wait and see", who do you beleive?

That commentary seems extremely off. A 30% stock market correction?? I don't think so. This gentleman sounds like Cramer ranting for the Fed to cut cut cut. He's probably long oil, gold and short the dollar as well.

I agree with you, Ivanovich, I think his opinion is a bit too heavy sided. However, in reality, depression has happened before. I'm not certain "depression" could happen again to the extremes that it used to, but I don't have a crystal ball. Recession-yes, Depression-?!?

I think the heavy-handed opinions really highlight the panicky nature of the markets right now. There are a lot of reasons to be on edge: record high oil, record low $, crumbling equities, increasing potential for stagflation in the US, continued turmoil in the Middle East and South Asia. It's an understatement to say that these aren't the best conditions in which investors can stay confident, and if the Fed doesn't cut in December, some of these fears will only be exacerbated.

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It seems like called for a further 30% housing market correction. Is this far-fetched? I'm not entirely sure that it is. All signs point to slowing economic growth yet mortgage rates and delinquencies continue higher. The MBS guy has a good point: we keep on hearing about "write-downs", not liquidations. If these funds ever decide to cut their losses short and flood the market with these asset-backed securities, mayhem would likely ensue.