A.G. EDWARDS & SONS, INC.
One North Jefferson, St. Louis, Missouri
31-955-3050
(January 31, 2002) FINANCIAL INSTRUMENTS: In the last issue of Futures AGE, we mentioned our model of the unemployment rate and consumer expectations. We will detail the model this week.
Unemployment Model
Chart courtesy of A.G. Edwards.
This chart shows the results of our unemployment model, which uses inflation-adjusted oil prices and consumer expectations to forecast unemployment. The model is forecasting a 6.7% rate by mid year. We expect this will be the peak, and unemployment will begin to decline slowly into early next year.
Fed Policy And Unemployment
Chart courtesy of A.G. Edwards.
This chart shows the Federal Reserve's fed funds target with the unemployment rate. Note that in Greenspan's tenure, the target is not typically raised until unemployment has peaked. This suggests to us that the target will not be raised until late third quarter at the earliest.
If the FOMC leaves rates unchanged until late September, we could see the deferred Eurodollar contracts converge in the current spot prices. March Eurodollars are trading at 98.05, with September trading at 97.25. With steady policy, the September contract could converge on the current March price. Thus, we recommend buying September Eurodollars at 97.10 (ob), adding a second at 97.00, risking to 96.80 with an objective of 98.10.
Bill O'Grady
www.agedwards.com