February 5, 2010
STOCK INDEX FUTURES
In the overnight trade, stock index futures came under additional selling pressure.
European equity markets also continued to fall due to fears that Portugal, Spain and Greece will continue to have problems in their attempts to control their budget deficits. The insurance premium (credit-default swaps) to insure the sovereign debt of Greece, Portugal and Spain increased to a record. The president of the European Central Bank attempted to talk up the value of the euro when he said "the solidarity of the euro area is not necessarily very well known and its situation compares very flatteringly with a number of other industrialized countries." He also said "we expect and we are confident that the Greek government will make the decisions that will permit them to reach their goal."
January nonfarm payrolls were down 20, 000, which compares to an estimate of a 15,000 increase. Even though the headline number was worse than expected, almost all of the other data within the report was better than expected. The unemployment rate fell to a five month low of 9.7%, which compares to an estimate of 10%. Manufacturing payrolls were bullish at up 11,000, when a 20,000 drop was forecast and the average work week was bullish, as well, increasing to 33.3 hours from an estimate of 33.2%. This is the highest work week rate in one year.
At 4:15 Central Time, Bullard of the Federal Reserve will speak about monetary policy.
Treasury Secretary Geithner will attend the Group of Seven meeting in Canada today.
Our analysis is telling us that a strengthening economy will be able to dominate over all other influences, including the political ones.
CURRENCIES
The U.S. dollar continued to gain against the euro as several members of the euro zone have ongoing issues with their above target budget deficits. There was additional pressure on the euro after Greece's largest union recently planed to strike on news of Prime Minister Papandreou's plan to raise taxes and increase the retirement age.
The Swiss franc fell due to rumors that the Swiss National Bank sold their currency in an attempt to keep it from increasing in value too quickly against the euro.
The Canadian dollar firmed after a government report showed that employment in Canada increased by 43,000 jobs, which compares to an estimate of an increase of 15,000 jobs. The unemployment rate fell to 8.3% from the 8.5% level last month.
INTEREST RATES
In the overnight trade prices gained due to the ongoing political and budgetary problems in Europe.
However, most of the gains were given back after the bearish on balance U.S. employment report was released.
Prospects of tighter credit from the Federal Reserve continue to get push out into the future. There is now only a 26% probability that the Federal Open Market Committee will increase their fed funds target by 25 basis points to 50 basis points at or before their August 10th meeting and a 48% chance that they will increase the rate at their September 10th meeting, according to the financial futures markets. No change in policy is expected at the next Federal Open Market Committee meeting, which will be held on March 16th.
Many of the primary government securities dealers believe that the FOMC will increase interest rates later rather than sooner, possibly not until next year. In the recent past, whenever the fed funds contract said one thing about the probability of a policy change and the primary government securities dealers said another, it was the primary dealers that proved to be the most accurate. We believe that the next tightening of credit from the Federal Open Market Committee will not take place until after the mid-term elections or even not until 2011.
We believe that we are in the early stages of a new bear market, especially for the longer dated issues.
For more information about this article, I can be reached at 312.242.7911 or via email at alan.bush@archerfinancials.com. Additional research can be found at www.archerfinancials.com/research.aspx.
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