US INTEREST RATES

Dec 10-year T-note prices corrected down to a 1-month low from their recent 5-1/2 month high while the 10-year T-note yield shot up to a 2-month high of 3.58%, moving farther above its recent 5-1/2 month low yield of 3.10%. Bearish factors for T-note prices include (1) the larger-than-expected decline in weekly continuing unemployment claims which tumbled to a 7-month low of 5.797 million (-148,000 versus expectations of -18,000), and (2) a possible huge increase in Treasury issuance after the prediction from FTN Financial that plans by the Treasury to lengthen its average maturity of its outstanding debt to 72 months from 49 months will mean boosting sales of 10-year and 30-year securities by 40% over the next year to $600 billion. Bullish factors include (1) the unexpected decline in Oct US consumer confidence (-5.7 to 47.7 versus expectations of +0.4 to 53.5) with the measure of employment availability within the consumer confidence report falling to a 26-year low, and (2) the prediction from Barclays Capital that Treasuries are poised to extend gains as demand for government auctions will remain strong and as the equity market remains vulnerable.

FOMC expectations—Market expectations for Fed policy were unchanged for the remainder of the year and were little changed for a tightening of monetary policy from mid-2010 and beyond. The market expects no significant chance of a Fed rate hike at the remainder of this year’s meetings. However, the market is then expecting a slow rise in the funds rate to 0.50% by July 2010, to 1.00% by Nov 2010 and to 2.00% by July 2011.

US STOCK INDEXES

The stock market’s 7-1/2 month upmove stalled in the past week as the S&P 500 index corrected down to a 3-week low from its recent 1-year high. That 1-year high represents a 48% correction of the 2-year plunge from the record high in Oct 2007 to March’s 13-yr low. Bearish factors for stocks include (1) concerns that the US housing market may remain at depressed levels after the unexpected decline in Sep new home sales along with concerns that lawmakers will phase out the $8,000 credit for first-time  homebuyers, and (2) the prediction from Smithers & Co. that the S&P 500 Index is overvalued by 40% and is headed for a drop as central banks begin to curtail their massive liquidity programs. Bullish factors  include (1) the stronger-than-expected US Q3 GDP (+3.5% q/q versus expectations of +3.2% q/q), which ended four straight quarters of contraction, (2) comments from Boston Fed President Rosengren that  “much of the US is in the early stages of recovery,” and (3) an overall betterthan-expected Q3 earnings season so far as 82% of the 236 companies in the S&P 500 Index that reported earnings results since Oct 7 have exceeded expectations.

Earnings expectations for the S&P 500 are as follows, according to Thomson Financial: Q3-2009 (-18.2%), Q4-2009 (+200.7%), Q1-2010 (+36.6%), Q2-2010 (+20.1%). S&P 500 annual earnings are expected at -9.2% in 2009 and +27.3% in 2010 (2008 -23.9%, 2007 -3.7%, 2006 +16.1%, 2005 +13.7%, 2004 +20.2%, 2003 +18.4%, vs 25-year average of +8.6%). The S&P 500 forward P/E (based on forward-looking earnings) is at 17.1, well above the 5-year average of 15.3.

******************************************************************************************************************
Like what you're reading? Get a Free Trial to CRB's Futures Market Service!

This weekly publication is designed to make you a more powerful trader through the understanding of the  fundamental factors moving the comodity and financial futures markets. Also included in the service is a weekly version of the highly rated CRB Futures Trend Analyzer, an automated technical trading system providing specific trade recommendations with exact market entry and exit points. Sign up today!
******************************************************************************************************************

Copyright © 1934-2008 Commodity Research Bureau, a Barchart.com, Inc. company. All rights reserved. 330 South Wells Street, Suite 612, Chicago, Illinois 60606-7110 USA • 800.621.5271 or 312.554.8456 • E-mail: info@crbtrader.com • Website: www.crbtrader.com. The information herein is compiled from public sources believed to be reliable but is not guaranteed as to its accuracy or completeness. No responsibility is assumed for the use of this material and no express or implied warranties are made. Nothing contained  herein shall be construed as an offer to buy/sell, or as a solicitation to buy/sell, any security, commodity or derivatives instrument.