The market continues to prove that we are truly in a transition period, as the sideways action continues in the interest rate markets. In the last newsletter, I discussed the belief by many that we have bottomed in the stock market. Surprisingly, the market managed to forge through the 140250 key resistance level, and the long-term trend channel broke to the upside on the S&P 500. Although I have been hearing several analysts claim that the bottom is in, it is also believed that it will take time for the market to correct and find increased upside momentum. In other words, continued volatility is expected. We still need to see improvements in housing, sales, employment, and business growth.
Last week, the highly anticipated monthly non-farm payrolls report and Federal Open Market Committee (FOMC) meeting took place. Since the FOMC meeting took place earlier in the week, I will discuss this first. The Fed cut the discount and Fed Funds rates by 25 basis points, as expected. There were two voting members that dissented from voting for the 25 basis point Fed Funds rate cut, due to increased inflationary concerns. The market reacted with mixed emotions, due to the post meeting comments. The comments left much more concern for the housing market and credit crunch than what the market initially believed, causing the interest rate markets to rally after the comments were made. This mixed attitude in the market carried over to the unemployment situation last week. The weekly jobless claims came out higher than expected at 380,000 claims versus 360,000 expected, leaving the market expecting the worst for the monthly unemployment report. The monthly unemployment report came out much better than expected at a decline of 20,000 jobs versus an expected decline of 75,000 jobs. The good news is that the report came out much better than expected. The bad news is that the report came out with a declining jobs number.
Federal Reserve Chairman Ben Bernanke made comments in the midst of the financial crisis that he expected inflation to cool as economic growth declined. However, global demand for physical commodities continues to remain high, even though domestic demand for goods and services is waning. Mining issues seem to be extreme around the world, causing the prices for goods such as copper to remain high. The crude oil market continues to make new contract highs as well, due to political turmoil and supply disruptions. The high energy and input prices could be the factor that limits a potential rally in the stock market.
Finally, the primary factor that is expected to contain any upside momentum in the stock market is the housing market. As home values decline, 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, which is also increasing the risk that the number of foreclosures will continue to rise. Bernanke made comments late Monday, indicating that current foreclosure policies may not be adequate in today's environment. The issues that have faced sub-prime borrowers are spilling over to prime borrowers. The housing market issues clearly do not support the argument for a robust economy.
Fed Watch: The Fed's focus will likely start to shift to potential inflationary risks, as the liquidity issue improves. The Fed reacted exactly as expected when cutting the Fed Funds and discount rates by 25 basis points last week. It is believed that the Fed will hold steady at the next meeting,due to further inflationary concerns.
Technical Update for June Ten-Year Notes:
Near-Term Trend: Sideways to Lower
Long-Term Trend: Sideways
Support: 114-20.5, 113-28.0
Resistance: 116-12.0; 116-25.5
The longer-term trend is still pointing higher. The sideways to lower action in the market is indicative of the tug of war between growth and inflation. The increased inflationary pressures are supporting longer-term yields, and in turn could pressure the TY price as the odds of further aggressive rate cuts are declining. Look to become a seller of TY notes on a close below 114-20.0. A break and close below the 114-00.0 area would indicate a long-term trend change.
Upcoming Key Reports:
| 5/7/08 | -- | Productivity and Costs - 7:30 am CST API/EIA Energy Stocks - 9:30 am CST |
| 5/8/08 | -- | Weekly Jobless Claims - 7:30 am CST Wholesale Trade- 7:30 am CST EIA Gas Storage - 9:30 am CST |
| 5/9/08 | -- | US Trade Balance - 7:30 am CST |
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| 5/14/08 | -- | CPI - 7:30 am CST Real Earnings - 7:30 am CST API/EIA Energy Stocks - 9:30 am CST |
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| 5/16/08 | -- | Housing Starts and Permits -7:30 am CST |
| 5/20/08 | -- | PPI - 7:30 am CST |
The risk of loss in trading commodity futures and options can be substantial. Before trading, you should carefully consider your financial position to determine if futures trading is appropriate. When trading futures and/or options, it is possible to lose more than the full value of your account. All funds committed should be risk capital. Past performance is not necessarily indicative of future results.
