STOCK INDEX FUTURES
S&P 500 futures are on track to make another new 5 month high. Futures are extending their gains from yesterday afternoon, after the FOMC released the minutes from their September 21 policy meeting. In this report, policy makers indicated their willingness to stimulate the economy through the additional purchase of assets. Any new quantitative easing plan will push interest rates lower for the entire yield curve.
Some of today's strength is due to better than anticipated sales forecasts from Intel and stronger than expected third quarter earnings from JPMorgan and CSX Corporation. Just as the earnings trend for Alcoa Inc. is considered to be the bellwether indicator for the rest of the Dow Jones industrials earnings reports, the earnings results for CSX Corp. are considered to be the bellwether indicator for the railroad industry. Our analysis continues to show that third quarter corporate earnings will be better than the analysts' estimates.
The Mortgage Bankers Association reported mortgage application in the week ended October 8 increased 14.6%, which compares to a .2% decline in the previous week. This is the first increase in six weeks.
The September import price index, on a monthly basis, was down .3%, when a .2% drop was anticipated.
Federal Reserve Bank Chairman Bernanke will discuss business innovation at 3:10 Central Time.
The leading fundamental and technical indicators that we pay the most attention to remain bullish for stock index futures.
CURRENCIES
The U.S. dollar is lower on the belief that any new quantitative easing program in the U.S. will cause interest rate differentials to turn even more unfavorable for the greenback.
The euro gained and is closing in on its January highs, after the European Union's statistics office said industrial production in the euro zone increased 1% in August. The median estimate for the report was a .8% advance.
The Japanese yen gained after a report showed Japanese machine orders unexpectedly increased 10.1% in August.
The Australian dollar advanced to near its highest level since it started to freely trade in 1983, after a consumer confidence index jumped 3.3% in October.
We remain bullish on the Australian dollar and on the Canadian dollar, which are considered to be the "commodity currencies."
The next upside price target for the Australian dollar is parity with the U.S. dollar, while Canada's currency appears to be on track to reach parity with the U.S. dollar, as well.
INTEREST RATE MARKETS
Prices are mostly lower in light of higher equity and commodity prices.
Because of ramped up speculation of another large quantitative easing program, the yield on the 30-year Treasury bond is now at a record wide level against the 10-year Treasury note. Many analysts believe that the FOMC will announce a new quantitative easing initiative at the conclusion of their November 2-3 policy meeting.
Yesterday's Treasury auction $32 billion of 3 year notes was not especially well received. Today, the Treasury will sell $21 billion of 10-year notes and tomorrow they will offer $13 billion of 30-year bonds. Today's 10-year note auction is expected to be better received than the 3-year note offering.
Currently, financial futures markets are predicting there is at least a 32% probability that the FOMC will lower their fed funds target to zero percent from the current level of zero to 25 basis points before the end of the year. Financial futures markets are also indicating that the FOMC will not be in position to increase their benchmark interest rate until the first quarter of 2012.
The bearish influence of a gradually improving economy will ultimately dominate over the bullish influence of probable Federal Reserve asset purchases. It is probably a good idea to stand aside in the credit markets for now at least until the Federal Reserve actually formally announces a secondary quantitative easing plan.
For more information, I can be reached at 877.690.7303 or via e-mail at alan.bush@archerfinancials.com. Additional research can be found at www.archerfinancials.com/research.aspx.
Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The views and opinions expressed in this letter are those of the author and do not reflect the views of ADM Investor Services, Inc. or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright © ADM Investor Services, Inc.
