The Consumer Price Index (CPI) and Producer Price Index (PPI) continue to rise. The CPI came out last week up .4% versus up .3% as expected. The core CPI, which excludes food and energy prices, was up .3% versus up .2%. The PPI was much higher than expected, up 1% versus up .4% expected. The core PPI was .4%. I would have expected this news to pressure the stock market and the bonds. The S&P and the bonds sold off slightly immediately after the announcement, but turned out to be a non-event for the market. On a longer-term note, an increase in PPI should be bearish stocks because profitability tends to decline for companies. The S&P futures appear to be forming a triangle, which is usually a continuation formation of the previous trend. The trend is down in this case, and I would expect to see a price decline equal to or greater than the distance of the widest part of the triangle from the breakout point.
The retail sales numbers surprisingly came out stronger than expected, up .3% a few weeks ago. This sounds bullish at first glance, but there reportedly has been an increase in gift card purchases used for essential and perishable items-rather than nonessential goods. Also, we are expecting the extremely cold and snowy weather conditions in much of the U.S. to cause consumers to pass on nonessential shopping trips, likely pressuring next month's numbers. Inflation also is becoming more and more of a concern in every household.
The weaker trend for existing home sales and new home sales figures continues to prevail. Existing home sales are down to 4.8 million units for the month of January, versus 6.4 million units sold in January 2007. The trend is still pointing down and is not likely over. The new home sales are expected to come out Wednesday morning at 600 thousand units sold. The decline in home values is of more concern than the decline in the number of sales though. As value decreases, the household percent of debt relative to assets increases, creating more economic growth pressure. This decline in assets is further increasing the risks that lending institutions face, as a result of many high risk loans given in recent years. As a result, growth remains the primary concern for the Fed-as it is expected to cut the short-term rates, and especially the discount rate. At this point, the counter party trust between lending parties remains high.
The weekly unemployment data came out at +349,000 jobless claims last week. This was in line with expectations. More importantly, the monthly non-farm payroll report is coming out a week from Friday. At this time, the market is expecting an increase of 40K jobs created for February. A negative number would be a sign of weaker growth and would likely pressure the stock market and increase vulnerability.
Fed Watch: The market is mixed on the next move of the Fed. According to Bloomberg, 96% of economists surveyed are expecting a 50 basis point rate Fed funds and discount rate cut in March. On the flipside, many analysts are becoming more concerned with inflation, due to the higher-than-expected CPI and PPI numbers recently released. According to some recent speeches made by voting Fed members recently, another rate cut is not a guarantee.
Technical Update for March Ten-Year Notes:
The June TY note contract is front month as of Friday.
Near-Term Trend: Sideways to Lower
Long-Term Trend: Higher
Support: 113-26.0; 112-19.0
Resistance: 115-06.5; 118-03.0
The longer-term trend is still pointing higher. The sideways action in the market is indicative of the sideways tug of war between growth and inflation. The increased inflationary pressures are supporting longer-term yields. The concern for a slowdown in growth is pressuring short-term yields.
Upcoming Key Reports:
| 2/27/08 | -- | Durable Goods Orders - 7:30 am CST New Home Sales - 9:00 am CST API/EIA Energy Stocks - 9:30 am CST |
| 2/28/08 | -- | GDP - 7:30 am CST Weekly Jobless Claims - 7:30 am CST EIA Gas Storage - 9:30 am CST |
| 2/29/08 | -- | Personal Income - 7:30 am CST Core PCE Inflation - 7:30 am CST Chicago PMI - 8:45 am CST Michigan Sentiment - 9:00 am CST |
| 3/3/08 | -- | Construction Spending - 9:00 am CST ISM Index - 9:00 am CST |
| 3/5/08 | -- | ADP Employment - 7:15 am CST ISM Services - 9:00 am CST API/EIA Energy Stocks - 9:30 am CST |
| 3/6/08 | -- | Weekly Jobless Claims -7:30 am CST Pending Home Sales - 9:00 am CST EIA Gas Storage - 9:30 am CST |
| 3/7/08 | -- | Monthly Unemployment -- 7:30 am CST Consumer Credit - 2:00 pm CST |
| 3/10/08 | -- | Wholesale Trade - 7:30 am CST |
| 3/11/08 | -- | U.S. Trade Balance - 9:00 am CST |
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