FMX | Connect – www.fmxconnect.com - (Reported 7/22/2010)
Excerpt from MARKET MUSINGS & DATA DECIPHERING
WHILE YOU WERE SLEEPING
Equity markets have recovered on the back of decent bank earnings results (Morgan Stanley, Credit Suisse) and a positive industrial orders report out of Germany (European PMI’s and UK retail sales also surprised to the high side). Markets are becoming comfortable – perhaps complacent – over the view that the worst of the European debt storm is behind us.
Investors are also buoyed by the news that we now have two Democrat Senators calling for a repeal of next year's planned tax hikes. And almost everyone is ecstatic over the looming bank stress tests. While Mr. Bernanke fell short of holding Mr. Market's hand yesterday – more quantitative easing is not right around the corner – he did at least convince investors that policy would remain accommodative, indefinitely.
As a result, the futures market, which on July 1st was pricing in over 70% of odds of the first rate hike coming by March of next year, has repriced that probability all the way down to 4% (was 13% ahead of the Fed Chairman's testimony). The lingering anomaly: the market is still discounting 30% odds of that hike occurring by the following month (odds were 78% on July 1st and 36% on Tuesday).
“UNUSUALLY UNCERTAIN”
Those were the words Ben Bernanke used to describe the macro outlook. He refrained from discussing double-dip risks, but in contrast to the market's desire for more policy juice, he actually spent more time talking about the how, "at some point, the Committee will need to begin to remove monetary policy accommodation to prevent the buildup of inflationary pressures".
Amazing – the Fed is still pre-occupied with inflation at this juncture
BONDS LEAD
The big news yesterday was the continued decline in bond yields – with the 10-year note closing down at 2.88%, which is the lowest since April 2009. This is critical because the Treasury market is telling a different story than equities are...but remember which asset class really leads.
Treasury yields peaked three months before equities peaked in 2007 (June vs. October) and bottomed three months before equities in 2008-09 (December '08 vs. March '09). When did Treasury yields peak this year? Try early April at 4.01% – while "hope" persists in equities we doubt that this condition will be sustained as the weakening in the economic data points spill over into the earnings landscape.
MORTGAGE APPLICATIONS REBOUND BUT STILL POINT TO WEAK SALES
Mortgage applications managed to rise 7.6% for the week of July 16th with increases in both the purchase index and the refinancing component. Refis rose 8.6% for the week (as fixed-rate mortgage rates fell by 10 bp) while the purchase index rose by 3.4%.
Yes, this is definitely good news but we can’t help ourselves and point out that the rise in the purchase index comes after four consecutive weekly declines. For the month of July, the purchase index is down nearly 5% unannualized – hardly a sign of a recovering housing market and points to weak housing sales in the months ahead.
CANADIAN DATA: LINING UP ON THE WEAK SIDE
Canadian wholesale sales fell 0.1% in MoM, missing estimates for an increase. The decline was skewed by a large decline in agricultural products and outside of this, six of the seven other sectors actually rose.
Despite the fact that the decline was concentrated in one sector, we still think this was a soft report. In inflation-adjusted terms, wholesales sales fell by 1.5% on the month (this directly feeds into Q2 GDP). While Statistics Canada does not release sector details in real terms, our guess is that other sectors outside of agriculture also declined given that nominal sales were boosted by higher prices (related to the weaker CAD).
David A. Rosenberg
Chief Economist & Strategist Economic Commentary
drosenberg@gluskinsheff.com
+ 1 416 681 8919
Source: Market Musings & Data Deciphering
http://www.fmxconnect.com/
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