US INTEREST RATES
Jun 10-year T-notes prices slipped to a 2-week low and the 10-year T-note yield climbed to a 2-week high, as yields fluctuated on either side of 3.70%. Bearish factors for T-note prices include (1) the larger-than-expected increase in the Feb US budget deficit to a record (-$220.9 billion versus expectations of -$201.0 billion), which may lead to further increases in Treasury issuance, (2) reduced safe-haven demand for Treasuries after the S&P 500 Index rallied to a 1-1/2 month high and sovereign debt concerns eased after former European Commissioner Prodi said the worst of Greece's financial crisis is over, and (3) the stronger-than-expected Feb US employment report that showed the Feb unemployment rate unchanged at 9.7% (versus expectations of +0.1 to 9.8%) and Feb nonfarm payrolls falling -36,000 (versus expectations of -63,000). Bullish factors include (1) comments from Chicago Fed President Evans who said that low interest rates are likely to be needed “for some time” as high unemployment lingers and inflation stays below the Fed’s target, and (2) comments from Treasury Secretary Geithner who said "substantial challenges remain for the economy and financial system" and that the US economy has not yet fully recovered from the worst recession since the Great Depression.
FOMC expectations—Market expectations for Fed policy over the past week increased slightly for a tightening of monetary policy starting near the end of this year. The market now expects a slow rise in the funds rate to 0.50% by December, to 1.00% by May 2011, and to 2.00% by Feb 2012.
US STOCK INDEXES
The S&P 500 index rallied to a 7-week high, just under January’s 17-month high. That 17-month high was a 53% correction of the 2-year plunge from the record high in Oct 2007 to last March’s 13-year low. Bullish factors include (1) the report from the US Labor Department that showed US job openings in Jan rose by +193,000 to 2.72 million, the second straight monthly increase and a sign that employers are gaining confidence in the economic recovery, and (2) the unexpected decline in Jan wholesale inventories (-0.2% versus expectations of +0.2%), which signals companies had difficulty keeping up with demand as sales increased for the tenth straight month which brought the inventory-to-sales ratio down to 1.10 months, the lowest since records began in 1992. Bearish factors include (1) increased concern that China may soon raise interest rates and slow the global economy after its Feb exports surged +46% y/y and its Feb consumer prices jumped to a 16-month high, and (2) data from ICI that showed cash in US equity mutual funds dropped to 3.6% of assets in Jan, the second lowest on record, meaning there is less cash to drive new stock market gains.
Earnings expectations for the S&P 500 are as follows, according to Thomson Financial: Q4-2009 (+201.1%), Q1-2010 (+36.7%), Q2-2010 (+22.6%), Q3-2010 (+23.1%), Q4-2010 (+30.7%). S&P 500 annual earnings are expected at -5.8% in 2009 and +27.0% 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 14.7, modestly below the 5-year average of 15.3.
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