S&P 500: +10.23 (+0.94%)
Stocks rallied ahead of the many earnings reports due this week and a statement from the New York Fed today suggesting that the Fed funds rate will remain in place. The Fed statement was music to commodity traders’ ears, with crude oil plowing through $79 a barrel.
When measured in Euros, the price of oil is just below its June high, so there is little doubt that part of the oil price rise is a result of the slide in the U.S. dollar. The tumbling dollar has received heavy media attention, which is warranted considering its near record lows against other major currencies and gold. The dollar’s decline is mostly due to the loss of the “safe-haven” premium it obtained during the financial crisis.
It’s important to remember, though, that the dollar remains well above the low reached in early 2007 – a time when the U.S. economy and stock market were strong and budget deficits were much smaller. This doesn’t mean the dollar looks healthy. If the dollar were to fall below its 2007 low – about a 6% drop measured against the DXY index of developed countries – then we should be concerned. And you can bet the Fed would bid farewell to their zero-interest-rate policy at this point.
Hopefully the Fed doesn’t wait for such a moment to raise interest rates from emergency levels. The calls are getting louder for the Fed to at least tap on the breaks, with Barron’s cover article saying the Fed should raise rates to accommodative levels from crisis levels. After all, it was easy money that helped inflate the housing bubble that eventually popped. And this time around the Fed has bought more than $1 trillion in bonds!
This is a relatively light week on the economic data front, with PPI and Housing starts focus tomorrow, and Jobless claims on Thursday. Earnings will be this week’s main theme with 155, or about one-third of the S&P 500 firms, reporting quarterly results.
Quick Hits
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Peter J. Lazaroff, Investment Analyst
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