The S&P 500 index continued its 2-month upmove to a 5-1/2 month high as strong U.S. economic data and speculation China will loosen monetary policy outweighed European sovereign debt concerns.  Bullish factors include (1) a sign of improvement in the beleaguered U.S. housing sector after the Jan HAHB housing market index rose more than expected to its best level in 4-1/2 years (+4 to 25), (2) the larger-than-expected increase in the Jan U.S. University of Michigan consumer confidence which rose to its best level in 8 months (+4.1 to 74.0), and (3) speculation China will avoid a hard landing after Q4 China GDP expanded at a +8.9% y/y pace, although stronger than expectations of +8.7% y/y, was the slowest pace of growth in 2-1/2 years which bolstered speculation the Chinese government will ease monetary policy.  Bearish factors include (1) the action by Standard & Poor’s to downgrade the European Financial Stability Facility to AA+ from AAA, which may fail to contain the European debt crisis as the bailout fund’s lending capacity is reduced and (2) global growth concerns after the World Bank cut its 2012 global growth forecast to +2.5% from a June estimate of +3.6%.

Fundamental Outlook—Short-Term Bullish—Stock prices improved as stronger-than-expected U.S. economic data and speculation China will ease monetary policy fuel optimism the U.S. economy will withstand the negative effects of the European debt crisis.  The European debt turmoil and global growth concerns, however, continue to be a  threat for stock prices.  Other supportive factors include strong earnings, low interest rates, and reasonable valuation levels with the low forward P/E of 12.6 (vs the 5-yr avg of 14.9 and 10-yr avg of 16.7).  

10-year T-note prices are consolidating just below last month’s all-time nearest-futures high while the 10-year T-note yield remains below 2.00% and modestly above September’s record low of 1.671%.  Bullish factors include (1) concern over a global economic slowdown after the World Bank cut its 2012 global growth forecast to +2.5% from a June estimate of +3.6% and Germany's Economy Ministry cut its 2012 German GDP forecast to +0.7% from an Oct forecast of +1.0%, (2) solid foreign demand for U.S. government debt after the Nov long-term TIC flows showed foreign holdings of Treasuries rose +1.7% to a record $4.75 trillion, and (3) continued safe-haven demand for Treasuries from the ever-widening European sovereign debt crisis after Standard & Poor’s downgraded the credit ratings of 9 European nations.  Bearish factors included (1) the plunge in weekly initial U.S. unemployment claims to their lowest level in 3-3/4 years (-50,000 to 352,000), (2) the stronger-than-expected Jan Empire manufacturing index which expanded at its fastest pace in 9 months (+5.3 to 13.5), and  (3) reduced safe-haven demand for Treasuries after the S&P 500 climbed to a 5-1/2 month high as successful debt auctions in Spain and France temporarily reduced European debt concerns.

Fundamental Outlook—Consolidation—T-note prices are consolidating just below last month’s record high as strong U.S. economic data and reduced European debt risks curtail safe-haven demand for Treasuries.  Bullish factors still supporting T-note prices include the Fed’s $400 bln Operation Twist, its pledge to keep rates exceptionally low through at least mid-2013, and Mr. Bernanke’s recent comment that a mortgage purchase program is a “viable option.”

 

 

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