The Wintrust Market Monitor is prepared weekly by Wintrust’s treasury department to give our staff and customers a view of the current markets and the financial week ahead. To receive this in your in-box each week, please register for the e-mail version or subscribe to the RSS feed to the right. This feature is for informational purposes only and should not be used as financial, investment or tax advice.

June 28, 2010

Weekly Wrap Up


A pretty poor week for almost all sectors.  Equities slid throughout the week as the major indexes shed almost 3% and gave back all the recent gains and then a little bit more.  The Dow’s brief flirtation with 10,500 failed and the next target certainly looks like 10,000.  BP and the Gulf got no relief as yet another failed attempt to stem the flow of oil failed even as estimates of spilled oil and rates of spillage keep increasing.  A near term solution to the spill is as unlikely as some good news for the housing sector.  Recent reports showed the end of the tax credit is hammering that sector as sales dropped 18% below last year’s anemic numbers.  The FOMC kept rates and its statement’s key phrase unchanged, but the brief statement is taking on a decidedly negative tenor after a string of fairly optimistic releases.  Interest rates fell, oil rose, and the dollar hung at recent levels.  Not many positives came out of last week as fears increased that downside risks to the economy are pulling even with the recent inflationary concerns.
The headline driver for last week’s tumble were the poor housing numbers and the reaction to the FOMC statement.  Neither of these should have been all that unexpected and neither was well received by the markets.  The housing numbers crashed lower as both sales volumes and median prices hit new lows.  New Home sales are now at a new record low pace of 300K, this is almost 80% lower than the high seen in July 2005 which hit 1.4MM.  On top of May’s dismal numbers there were negative revisions to March & April which knocked off almost another 100K from previous reports.  analysts were expecting the numbers to take a hit after the expiration of the tax credit, but no one saw this debacle coming and the revisions even bring into question whether the tax credit created any positive momentum at all.  The pace of sales is sitting at record lows and prices fell over 4% below last year’s depressed levels.  After several fits and starts and false bottoms there is now almost universal agreement that this sector remains mired in disaster.  While the damage to the overall economy from this sector has already been felt, the lack of any true signs of recovery in this sector will be another drag on the overall economy and another reason the Fed might stay on the sidelines.

The FOMC


Those concerns were addressed by the FOMC in the most recent statement.  The key “extended period” phrase remained and the statement still cited upside risks as the Fed’s main concerns, but the recent statement was far less optimistic in tone than the previous 2-3 had been.  The FOMC specifically acknowledged “depressed levels” in the housing market.  The FOMC also directly addressed the European meltdown for the first time and acknowledged that the European situation has caused “conditions have become less supportive of economic growth.”  The immediate reaction was subdued, but concerns about a double dip or staglfationary scenario led the equity sell-off on Thursday.  The Committee does not seem to have changed any of its expectations and continues to see a recovery, if a little slower than previously expected, for the US economy.  Hoenig continued his string of dissent, and despite getting some more support from others on the Committee in previous speeches, his remains the lone dissenting voice on the official record.  The biggest takeaway from the recent release is that the FOMC looks to be idle longer than analysts had been predicting.  The expectation is for rates to rise, but the timing of those increases keeps getting pushed out into the future and lowered in scope.  Fed Funds Futures have the FOMC on hold for the rest of 2010 and the average rate for all of 2011 is now only .56%.  This is about 100bps lower than expectations were several weeks ago and are only half of what Hoenig is calling for, a Fed Funds rate of 1% by the end of this summer.

Market Watch


While the FOMC still saw the glass as half full and the recovery moving ahead, the markets were disappointed in the recent data.  With the FOMC expected to be on the sidelines for several more months and the data showing signs of slowing or stalled recovery investors continued to move into the safety of Treasuries and commodities.  Last week saw the benchmark 10 Year Note dip below the 3.10% level and the curve dip across the board.  Short term rates remain pegged close to 0 while longer dated Treasury rates fell again.  A variety of factors seem to be at play and most of these are dropping rates.  The Treasury continued to bring massive supply to the markets, and this had created some concerns that the steady drum beat of supply would swamp demand.  Those fears have yet to materialize as last week’s auctions were some of the best bid in several months.  Foreign Central Banks have returned with a vengeance the last two months and last week’s bid numbers were more than solid.  Continuing fears about the euro have  helped fuel the flight to quality rally, and while Greece has taken steps to try and right its ship there remain many concerns that the crisis has merely paused and that many of the core issues remain unresolved.  With the FOMC apparently off the table in the near term many investors are having to reach farther and farther out on the yield curve for higher rates.  Even as equities have recovered sharply from last spring’s collapse interest rates remain low.
As the Dow has pushed back over 10,000 and made a run at 10,500, the benchmark 10 Yr Note has dropped nearly 100bps just since April.   Investors have returned to equities, but Treasuries have still remained an investment of choice.  The latest GDP figures showed the economy expanding at a slower than expected pace.  This was one more factor fueling expectations for low rates continuing and also added to investors increasing their appetite to reach for yield out along the curve.  Interest rates have decoupled a bit from equities as world uncertainty seems to be driving rates lower even as equities have rebounded off recent lows.

Commodities


While rates and equities seemingly have decoupled, the same could be said of commodities.  For months the dollar was driving oil prices, or perhaps vice versa, and those tended to lead equities.  Recently that has all changed.  The dollar has stabilized around the 1.20 – 1.25 euro level as the EU seems to have taken enough steps to at least give it a bit of a reprieve.  Meanwhile gold has simply made new high after new high and is currently priced over $1,250 an ounce.  Oil continues to be one of the most volatile sectors and has recently reversed its trend of lower prices.  June started with oil hitting $70 and falling for several weeks in a row.  Prices have reversed and are now trending higher with $80 the new target.  The dollar has been steady, the fundamentals are relatively unchanged, and so the reversal is almost completely based on investor expectations.  The Gulf spill continues unabated, but this seems to have had little real effects on the markets.  The small successes BP has had have been ignored in daily pricing while the repeated BP failures have not caused any noticeable spikes.  While higher prices seem to be the latest trend, picking a direction in this exceptionally volatile sector remains a hazardous endeavor.  Even at $80 prices are off 15% from recent highs.

What To Look For This Week


The week is off to a quiet start.  Heading towards the 4th of July Holiday weekend this could be a very low key week.  Many investors have their eyes on Friday’s key employment data, but by Friday there will also be many who will be long gone for the weekend.  The numbers are not expected to be very good so the surprises might be to the upside.  Light volumes and a short week could cause some dramatic, if short lived, swings.  This week looks to be setting up as a wait and see scenario.  Today’s better than expected Personal Spending number helped reverse some overseas losses on Sunday night but haven’t been able to spark any real rally this morning.  The rest of the week remains data heavy with the latest round of housing data, auto sales, some updated inflationary numbers, and the first half of the Fed favorite ISM surveys out.  The week is full of some key releases, but it looks like there will need to be some real surprises released to move the markets too far in front of Friday’s numbers.

Financial Reform


Over the weekend, Congress did manage to get a bill through reconciliation on financial reform.  After a marathon session, the bill made it out and will be presented to both houses before heading up to the White House.  No major changes are expected and it does look like President Obama will have his 4th of July signing ceremony as desired.  The full effects of this bill won’t be felt for a while, and few of those who passed the 2,000 page bill probably could tell you what is in the whole package.  Early consensus is that the bill is not as onerous to banks as first proposed nor does it give the banks a free pass.  The biggest knocks on the bill is that it does little to address the major causes of the recent collapse and it does not address the “too big to fail” issue.  While the particulars will take a while to be put into practice and the industry will have to see how regulators interpret the new changes, there is little doubt that this is one of the most important and sweeping changes to the financial landscape in a generation.

And On We Go To The 3rd Quarter


The end of this week is not only the 4th of July Holiday weekend, but the end of the quarter.  While the economic data shows signs of slowing, the quarter end will also bring the latest earnings numbers.  Alcoa traditionally kicks off the earnings season and is scheduled to release its numbers on July 12th.  While a lot can, and almost certainly will, happen between now and then there is a good chance that the markets will be looking past the economic releases and waiting for the upcoming earnings season to get a real sense of direction.  With the World Cup occupying most of Europe and Asia, summer holidays around the corner, a bit of a lack of direction in most markets, and no major world headlines driving the news it might be a relatively quiet and doldrums filled few weeks.