From glancing at the downward trending charts, the market appears to be expecting a rate hike in the not-so-distant future. What exactly has changed since the last Federal Open Market Committee (FOMC) meeting, when many people were still looking for the Fed to actually cut rates? The housing and mortgage markets have actually been stronger than expected. The new home sales surprised the market recently-coming out stronger than expected at .981 million homes sold versus .860 expected. Although this data is extremely positive, the prior month data was revised lower to .844 million homes versus .858. According to Dennis Gartman, downward revisions are not indicative of a truly bullish market. According to the Mortgage Bankers Association, the number of mortgage applications has been on the rise as well. Time will only tell if the increases in housing sales and mortgage applications are a long-term improvement-or simply a seasonal improvement.
The monthly employment data released last Friday exhibited more strength than previously expected as well. The market expected an increase of 135,000 nonfarm payrolls, only to surprise the market at + 157,000. Earnings were up +.3% as expected. The unemployment rate remained the same at +4.5%. The strength in the employment situation is highly attributed to the continued support of the housing market. Although the housing market is slower that it had been for quite a while, many jobs that were expected to be lost as a result of the slowdown were not. The fact that we are continually adding new jobs to the economy is a positive factor and confirms that we still have growth in the economy.
Earlier in 2007, many people expected the Fed to cut rates as a result of concern for the housing market. The housing market was expected to slow down growth and in turn ease inflation. The contrary appears to be taking place as inflationary pressures appear to be more and more significant on a daily basis. The cost of energy and food are on the rise and will likely begin pressuring economic growth in the near future. The CPI report scheduled for May 15th will be closely watched as a key inflationary report.
At this time, global liquidity remains very high. Therefore, the strength of the equities markets are expected not to be significantly affected long-term even if the Fed starts to raise rates. The world central banks seem to be on a tightening trend with the current loose monetary policy. Many countries (especially Asian countries) that have been saving money are now investing in the more well-developed equity markets of the United States and Europe to try to increase their earning potential, rather than investing in debt instruments.
Fed Watch: The market will continue to keep a close eye on any inflationary and growth information that may sway the Fed to change rates at the next FOMC meeting scheduled for June 27th and 28th. At this point, the market has almost completely discounted the probability of a future rate cut. Based on the technical action of the 10-year note and 30-year bond charts, the market is pricing in 1 or 2 25 basis point rate hikes by the end of the year or early 2008.
Near Term Trend: Down, overbought?
Long Term Trend: Down
Support: 105-17.5
Resistance: 106-04.5; 107-08.5
Upcoming Key Reports:
6/6/07 -- Productivity - 7:30 am CST
API/EIA Energy Stocks - 9:30 am CST
6/7/07 -- Weekly Jobless Claims - 7:30 am CST
6/8/07 -- International Trade - 7:30 am CST
Weekly Leading Index - 9:30 am CST
6/13/07 -- Business Inventories - 7:30 am CST
Retail Sales - 7:30 am CST
6/13/07 -- API/EIA Energy Stocks - 9:30 am CST
6/14/07 -- PPI - 7:30 am CST
EIA Gas Storage - 9:30 am CST
6/15/07 -- CPI - 7:30 am CST
Industrial Production - 8:15 am CST
6/19/07 -- Housing Starts - 7:30 am CST
