On Monday, the major U.S. stock market indices will be attempting to come off near two-year lows. Early on, the Fed’s decision to grant authority to the New York Federal Reserve Bank to lend funds to Fannie Mae and Freddie Mac to help them address potential liquidity challenges will likely figure in market trends.

If the immediate impact following the Fed’s creating its three temporary liquidity facilities—Term Auction Facility (TAF), Term Secured Lending Facility (TSLF), and Primary Dealer Credit Facility (PDCF)—is representative, the major indices should experience a boost.



However, once one gets beyond two weeks, continuing developments concerning fundamental factors, geopolitical developments, and market psychology will determine whether or not any rally is relatively short-lived. The July 15 Producer Price Index (PPI) and July 16 Consumer Price Index (CPI) reports could pose a significant challenge, especially if one begins to see higher inflation creep into the core numbers. My guess is that we’ll see the core CPI figure come in around +0.3% vs. the consensus forecast of +0.2%.

More immediately, Freddie Mac will be issuing short-term notes on Monday. The success of that auction could loom large. A successful auction might further mitigate immediate concerns. A continuing widening of the premium between Freddie Mac/Fannie Mae securities and comparable maturity Treasury instruments, especially after the Fed granted those government-sponsored enterprises (GSEs) the ability to borrow from the New York Federal Reserve could be troubling. It could well raise the specter that the Federal Government might need to take an investment stake in those GSEs, which would dilute shareholder equity and perhaps raise additional questions about a further widening of a government role with respect to those GSEs.

My early guess is that Freddie Mac’s auction will go reasonably well in the wake of the Fed’s decision.