agreed. I think cuts are coming sooner tha anyone thinks. the transportation index is now done and that bodes bad for retailers and consumer numbers and more housing cockroaches.

The big surprise would be a panic cut which could send gold flying.

Australia raised to 6% Bill and indicated further tightening likely.

The trouble with pausing in the face of accelerating inflation to "look around" is the possibility that you lose your grip on the snake and it bites you. This is why historically CBs overtighten. No one wants to have people say (as inflation goes to 6%) "the data was right in front of you stupid!". Human nature. Will Bennie and the Feds be the first to buck the trend?

Housing continues to fall over the cliff. Mortgage applications continue to decline even though rates are moderating somewhat.

http://calculatedrisk.blogspot.com/

Gee I thought the NAR spokesman said the decline was "orderly" as did Bernanke.

Other than the election year pressure to stop the rate hikes, there really is no reason for the Fed to stop the rate hike cycle at this point. Housing aside, the economy is still perking along just fine according to all the other indicators. It can easily sustain another half percent.

I've sitting in money markets since the end of May, at just under 5% here, waiting for the "pause".

I thought this piece from Ticker Sense was interesting:

http://tickersense.typepad.com/ticker_sense/2006/08/ism_report_and_.html

EyeDoc-
Draw a line under the lows off the '02 bottom for CPI. Then draw a line under the lows off the bottom for Commodities Up. In this alternative, no downtrend, just a consolidation from spike highs. Different interpretation; same chart.

we're looking kind of overbought on the intraday charts but overbought is as overbought does and sometimes you get your best quick rallies from this condition.

they're banging the OIH and the XAU through the downtrends which could be powerful. however, the BKX is a little red and GS is turning back from the breakout point.

i still think at the minimum they need to back up and get a running, spring-loaded start if they want to clear out enough sellers to get us through the S&P 1282 area. any pop through there now will just be to grab some stops.

at the maximum? long is wrong until we get some heavy selling out of the way.

just to mention this for what it's worth, i read that ADP - the company that so famously missed with non-farm payroll estimates last month - is predicting job growth of 99,000 for friday's announcement(source:tony crescenzi,realmoney.com)

i don't know enough to comment on ADP. everybody has a right to be wrong but it's got me thinking about the consequences of a really weak number.

right in here, the bulls are trying to translate economic weakness into market strength (slower economy, cheaper money) and eventually that may prove to be true but in the meantime, we'll be in the danger zone of slowing growth, anemic earnings and inflationary pressures. unless we get into a real market panic, they won't start cutting rates until they have to. that may be a ways off yet and the yield curve will tell us it's going to happen long before it does.

Housing is not in disarray because of the Fed's rate hikes. Housing is in disarray because of the Fed's previous rate cuts, among other factors.

The yield on the 10-year was approx 4.6% when the Fed started raising rates 2 years ago. It is at 4.9% today. It has barely moved.

So the nominal level of interest rates is not the problem.

The housing bubble emerged from a confluence of factors. A flight to safety after the equity bust. The natural ebb and flow of asset classes. An ocean of liquidity encouraging lenders to funnel toxic loans to anyone who could fog a mirror. A humongous trade deficit which recycled exporter dollars back into dollar-denominated assets, most especially Fannie, Freddie, etc. Did you know that 28% of the agency paper is now held by foreign central banks?

All these factors, combined with sentiment, conspired to foment a bull run in housing and droves prices up to unsustainable and unaffordable levels in many, if not most, markets.

Unless/until housing prices fall or incomes increase, it won't matter a whit if the Fed lowers rates. A lower rate environment might cushion the blow but it won't bring back the housing boom.

With the mo-mo emerging again in energy and metals, a pause next week would tank the doolar and the commodity complex could go vertical. The riskloves (as Russ Winter calls them) who are running these commodity trades are taunting Ben, "I dare ya to pause or lower rates." And housing is just caught in the crossfire.

So I don't see the fortunes of residential housing moving in lockstep with the ups and downs of interest rates. Especially when we're talking about minor increments up and down.

leewhee, I agree. Yesterday we learned that housing affordability is at a 20-year low in the U.S. Unless mortgage rates go down significantly (and how likely is that?), the only reasonable medicine for the housing market is price reductions. Or extreme wage inflation (and all its attendant side effects).

Of course, that hasn't stopped certain home builder executives from claiming that a Fed pause would restore buyer confidence. Price reductions will kill their margins even more than the hidden discounts they have already implemented, so I suppose it is understandable that they would avoid facing this certain reality.

What gets my goat is that the market is still treating these stocks as if a rate pause is going to save the day.

Excellent post leewhee, but before I commit to its entirety, I would like to know the quality of loans being purchased now by the foreign CB's. Have the standards of loans at Fannie, Freddie, et al really gone up recently? Or are the CB's purchasing the interest only with even increasing negative amortization crap that was so prevalent during the bubble.

Alan,

For more info on the agency purchases by the FCBs, read wallstreetexaminer.com. Also read the daily updates by Russ Winter at www.xanga.com/russwinter. Both cover this topic a great deal.

According to Winter, FCBs have really stepped up their purchases of housing agency paper. Just last week they added $8.9B worth, after avg'ing $3.3B in purchases a week over the past year.

FCBs have now moved 32.5% of their custodial dollar holdings ($534B) into housing agencies just as "the collateral has turned south", says Winter.

It does not appear that these FCBs (primarily China and Japan) are very discriminating when it comes to mortgage paper. They have to put excess dollars somewhere and they are steering clear of Treasuries in favor of Fannie and Freddie.

Some have even suggested that this huge appetite for agencies is little more than a subrosa bailout of Fannie orchestrated by central bankers.

Without billions each week to support the agencies, the housing market would have seized up long ago and/or the U.S. gov't would have been forced to monetize this toxic debt itself.

Thanks leewhee, but a very important part of the equation is the quality of the debt being created by Fannie, Fred .. right now and what the CB's are purchasing. As I asked last week, what kind of credit is GMAC creating and if selling it, to who?