The broad market did shake off the mid-day weakness as the S&P 500 rose nearly 1% from the day’s low in the final 90 minutes of trading to close positive, just barely.
Financials and health-care stocks were the worst-performing sectors of the day. Energy, utility, basic material and industrial shares enjoyed a nice day. Overall, six of the 10 major industry groups gained ground for the session.
As stated above, stocks began the day on a good note, as people had a chance to push aside emotional reactions to Friday’s employment report, which showed a jump in the unemployment rate, and acknowledged a couple of things.
One, monthly job losses remain very mild – as stated yesterday, the losses of the past five months are usually what we see in one month’s time during the typical job-market downturn.
Two, two-thirds of the increase in job-market entry came from the 16-19 age group – it’s that entry, as opposed to serious job losses, that caused jobless rate to rise. This entry usually occurs in June so the increase played havoc with the seasonal adjustment and probably means we’ll settle in at 5.5% unemployment for now instead of seeing the figure climb.
Three, a jobless rate of 5.5% is hardly something to get concerned over and since the seasonal adjustment process should keep the rate at this level, or even tick a bit lower next month, there’s nothing to get hysterical over.
The graph below shows yesterday’s intra-day activity on the S&P 500. The yellow line illustrates the opening price.
On the economic front, the National Association of Realtors announced the number of Americans signing contracts to buy existing homes unexpectedly rose in April as lower prices lured buyers back into the market. Let’s hope we’re onto something here. I suspect we’ll see the index bounce around for several months still, but no one expected a rise of this strength so maybe something has changed.The index of pending resales rose 6.3%, which followed a 1.0% decline in March. By region, April resales jumped 13% in the Midwest, 4.6% in the South, 8.3% in the West and were down 1.9% in the Northeast.
As touched on at the top, New York Fed Bank President Tim Geithner stated the Fed needs to give much consideration to raising rates as commodity prices threaten overall prices, which may begin to flow into the core rate, even if as this has yet to occur.
(As a personal aside, the FOMC needs to forget about the core rate right now and realize that energy prices are causing not only consumer pessimism to rise but the latest small business survey cited these costs as one of their main concerns. The core rate remains extremely benign and while this is a benefit of strong productivity increases it is also a result of businesses eating costs, instead of passing them along, That hurts profit margins.)
The market didn’t seem to appreciate these comments from Geithner but I think more investors will over time. It is vitally important for the Fed – which did great work via comments last week – to work on inflation expectations and the dollar. Friday’s job-market data and ECB (European Central Bank) President Trcihet’s comments didn’t help the greenback at the end of last week, but the Fed seems to be determined to work this strategy. For now these are just words, but this will be followed by action and as they gently raise fed funds back to 3.00% the dollar will strengthen and oil will come off.
Bernanke followed up on Geithner’s comments last night in Boston as he stated the central bank “will strongly resist an erosion of longer-term inflation expectations.” Again, the market is not enjoying this news for now, futures are down on the comments, but if they follow through on these comments with action, I believe it will be a major plus.
The graph below shows the implied probabilities of a rate hike by the September 16 meeting. Fed funds currently sits at 2.00%.
And speaking of energy costs, the dollar and overall inflation, we often talk about energy policy – ie, drilling for vastly more of our abundant resources – and tax policy that remains accommodative to growth.
It is a real shame, especially at a time when many consumers are feeling a bit pinched by high energy costs and a meaningful housing correction that these policies have not been brought to the table in a earnest way. I believe one would be amazed at what could pass in an election year.
You want to manage energy costs over the long term, the answer is diversification. Diversification regarding geographic placement of our infrastructure so a single hurricane cannot knock a high degree of transmission off line for several weeks. Diversification in terms of sources: more coal, crude and nat gas production. In addition, building more nuclear power plants is essential. Solar and wind are fine for where they work.
Regarding nuclear, some worry about waste. OK, simply revoke the Carter-era policy that outlawed nuclear recycling. France for heaven’s sake has produced 80% of its electricity with nuclear power for 25 years and since they recycle nuclear fuel they store all of their high-level waste in a 3500 square foot space. Recycling seems to be all the rage regarding everything else under the sun, but not for nuclear. This is pathetic.
Want to strengthen the dollar via the best way possible. Send a signal to investors -- not just domestic risk takers but global risk takers too -- that tax rates are not going to rise on them and erode after-tax return expectations.
But if this is not going to occur, as it surely seems it will not in the near term, then there is something that can be done -- now. Something that can immediately bring crude prices lower via a strengthening of the dollar and that is intervention. Treasury Department intervention, with cooperation of other G7 members, and at a time when it appears the Fed has seen the light and just may begin to mildly raise fed funds back to 3.00% over a series of meetings, will do the trick.
This will jolt an economy that is already poised to accelerate and provide further strength to the greenback to get us back to the 85 level on the Dollar Index, which in my mind is the optimal level. Optimal for trade and a level that will bring oil – which is priced in dollars – lower.
Have a great day!
Brent Vondera, Senior Analyst
No comments:
Post a Comment