Fed Holds Rates Steady

The opening sentence of today's FOMC statement reads:

The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 1 percent.

Decided today, really? By looking at the effective federal funds rate, it looks like this policy action was decided two weeks ago.

Last-Minute Rally

With one and a half hours left in today's session, the S&P 500 rose from its intraday low of 860 to 908 at the close. That's a 5.6% intraday move to close the session up 1.26%. That's quite an impressive rally, but how was volume and breadth?


The chart above shows NYSE volume was much heavier today than the past couple days. The bottom portion of the chart shows today's volume relative to yesterday.

Cumulative volume compared to yesterday increased steadily all day, as stocks fell, until the last couple hours of trading. This suggests buying was sparse even though the price movement was strong.

Further, breadth was not at all impressive: declining issues outnumbered advances on both the NYSE (2,152/1,291) and NASDAQ (2,032/824).

New Blog - FOSS Trading

I've started a new blog to focus on trading and quantitative finance using free open source software. I will post updates on my R packages on that blog instead of Quantitative Contemplations.

You can find the new blog at http://blog.fosstrading.com.

September Inflation

The chart below shows headline and core CPI have climbed sharply since mid-2006. Headline CPI is currently near 5% year-over-year, while all measures of core CPI are at 3%.

Why, even though inflation is high and has been increasing, does the Fed consider inflation expectations to be contained? The Fed noted the fall in commodity prices, which will dampen inflation in coming months, in their October 8th statement. They also noted inflation expectations have diminished.

The following chart shows inflation expectations via the spread between the 10-year constant maturity Treasury rate and the corresponding TIPS rate. Expectations currently stand at an average of 1% per year for the next 10 years. I seriously doubt this will be realized; it's more likely a function of the current market pessimism.


Two important caveats: (1) the spread has two components - expected inflation and inflation risk premium, and (2) TIPS yields have a liquidity premium. Given the short-term nature of our comparison, neither of these caveats should be too problematic.

Short Sale Ban Lifted

Today was the first day since September 19 that many financial stocks could be sold short. And there was certainly a lot of selling today. The Financial Select Sector ETF (XLF) dropped 10.4%.

If you only consider today's action, you may conclude that the short-selling ban was working. That could not be further from the truth. Financials rose nearly 12% on the day the ban was instituted, but it was almost all downhill after that. Only 4 of the next 13 days were positive. Over the whole period the ban was in effect, the XLF fell 23.6% (from the close on 9/18 to the close on 10/8).

The major indices have seen declines, many of them severe, in the last 7 consecutive trading sessions. We most certainly would have seen a short-squeeze within that period, had short sales been allowed.

Surprise Fed Cut

From this morning's press release:

Inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability. The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability.

Some easing of global monetary conditions is therefore warranted. Accordingly, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, Sveriges Riksbank, and the Swiss National Bank are today announcing reductions in policy interest rates. The Bank of Japan expresses its strong support of these policy actions.

Federal Reserve Actions
The Federal Open Market Committee has decided to lower its target for the federal funds rate 50 basis points to 1-1/2 percent. The Committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures.

The futures market initially shot up in response to this news. Within an hour, however, they had fallen back to their pre-release levels. Perhaps the market realized this crisis has not been due to restrictive monetary policy, but rather deleveraging of financial institutions and ignorance of where those institutions' risk lies.

The spot markets gapped slightly lower but have been making gains since the open.

opentick now on CRAN

The pre-alpha version of the opentick package I mentioned previously is now on CRAN. The package provides a native R interface to the opentick data servers, which include both real time and historical market data.

(Disclaimer: This software is not endorsed in any way by opentick corporation. The author(s) of this software are not affiliated with opentick corporation.)

The package currently includes a limited R implementation of the otFeed API. Its current functionality enables access to historic data from the opentick servers. Future additions will include access to:

• real-time data feeds (for most U.S. stock, option, and futures exchanges).
• real-time option chains.
• real-time and historical book data.

I will use other's interest to gauge the priority of these additions.

Please note that opentick is not currently accepting new users, but current users will retain their access. This has been the case since April and it is not clear when new users will be allowed. You can sign up to be notified once new users will be accepted.