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(CEP News) - As U.S. equity markets rebounded following yesterday's massive sell-off, Fed funds futures are now pricing in a 92% chance of 25bp cut and only an 8% chance of a 50bp cut. This is sharply lower from Monday's 66% chance of a half-a-point cut in rates.
The Dow Jones industrial average closed up 485 points (4.68%), the S&P 500 closed up 58 points (5.27%), the Nasdaq finished the day up 98 points (4.97%) and the TSX closed up 467 points (4.15%). On Monday, after the U.S. House of Representatives voted against the Treasury's bailout plan, the Dow Jones tumbled more than 770 points, or 6.96%, and the TSX lost more than 840 points, or 6.93%. For the year-end meeting scheduled for Dec. 16, markets are now pricing in a 70.6% chance of a 25bp cut, an decrease from yesterday's 100% expectation, while the chance for a 50bp rate cut fell to 27.5% from 54.8% a day ago. Markets are anxiously awaiting news from Congress about a new bailout plan. U.S. Senator Christopher Dodd said in a speech to the Senate that a "positive result" on the bailout package would be seen in the next 24 to 48 hours. Eric Lascelles from TD Securities said with the failure of the $700 bailout and the ensuing chaos, the possibility of a rate hike has gone up significantly, even though such an option wouldn't be ideal. "Barring a catastrophic further market move, we are inclined to think that any further Fed easing would wait to see if the $700B program can be successfully revisited in the next few days," Lascelles said. "We believe the greater focus for the Fed should be on the problem of interbank liquidity, especially beyond the overnight period. Liquidity injections are the solution to this, not rate cuts." Looking to the meeting set for Jan. 16, 2009, markets are factoring in a 66.6% chance of a rate cut, down from the 100% chance a day ago. The probability for a 50bp rate cut fell to 25.2% from 51.4% on Monday. By Steve Stecyk,
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, edited by Nancy Girgis,
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