This morning, in the wake of a truly hideous report on the Midwestern manufacturing economy, the stock market took a sharp jog lower. And then, against all good sense, jumped higher.
The Chicago Purchasing Managers index, or PMI, dropped to 38 in July from 44.4 in June, a far greater pullback than economists had expected. The report put the kibosh on recent optimism that the region's manufacturing base, dominated by the auto industry, had begun to find its footing. Yet in the equity arena, traders chose not to dwell on the bad news, focusing instead on a belief that the report opens the door to a half-point cut at Federal Open Market Committee's meeting three weeks from today.
That belief is unfounded.
In testimony before Congress two weeks ago, Fed Chairman Alan Greenspan signaled that, absent some disaster, the Committee won't be taking down rates at the half-point clip seen earlier this year."Certainly, should conditions warrant, we may need to ease further," quoth the Chairman. "But we must not lose sight of the prerequisite of longer-run price stability for realizing the economy's full growth potential over time." Following the speech, a Reuters poll showed that economists at all 25 primary dealers expected the Fed to cut rates by a quarter-point at its August meeting. Speeches from other talking Feds at the bank have only served to strengthen the impression that it will not cut aggressively. "They basically told us they would expect further easing to depend on the data and be in quarter-point steps," says Salomon Smith Barney economist Steven Wieting. "They've already made their decision."