DAILY MARKET COMMENTARY
May 22, 2013
Closing Comment
I am jumping the gun a tad on my timing here, but I have to close up my equipment and head for the airport. There is still an hour of trading left in the stock market and anything is possible. Consider that stocks opened with a nice bid, leapt higher (+157 points at one stage) as Bernanke assured us that QE tapering off was some months away, then gave up all those gains to actually lower by -60 points as we enter the last half-hour of trading.
Bond prices were serenely unchanged going into the Chairman’s testimony expecting him to basically repeat what Dudley had said already. This is pretty much what he did. However, the bond market went into a swoon anyway. The 10-year Treasury spiked up to 2.03%, providing a retest of the year’s highest yield (2.09%). Futures traders report that selling pressure in 10-year note futures is happening on record volume. This is not a good thing to see if you want to be bullish. The best face that could be put on this volume would be that we had a capitulation trade this morning and that the sellers would now be finished. We’ll see about that one.
Bernanke basically reinforced that the Fed was consistently monitoring the situation, but that it will probably take a lot more data to conclude that the economy is out of danger. He reiterated his belief that the fiscal drag from sequester and tax hikes was making the Fed’s job of stimulating the economy that much more difficult. He noted that the Fed has only an indirect role in producing employment and that Congress should take off some of the current headwinds. I’m not sure why bond traders took this testimony so negatively, but they did.
For a while there, the markets were in a disconnect. If bonds concluded that Bernanke’s comments pointed to an early end to QE (as indicated by bond selling), then stocks should really be concerned. The stock market (and the housing market) has been direct beneficiaries of QE activity. These asset classes have at least as much at stake as does the bond market.
As I write these words (and well before the close of bond trading) the 2-year is 0.24%, the 5-year is 0.89% (down -10/32) and the 10-year is 2.02% (a drop of -26/32).
The Fed minutes from the April 30-May 1 meeting were released into the trading turmoil. They showed a lively debate about the timing of a possible tapering off of QE, but the language was clear that “many” on the Fed favored a continuation of current levels of QE support. They want to see more evidence that employment gains of late will be sustained before even considering cutting back on their current levels of 40 billion MBS and 45 billion Treasuries per month. They reiterated that they “may increase or decrease” these amounts depending on the state of the economy in the future.
I mean, I hope the Fed will be responsive to economic conditions as they set policy. I don’t think that this is the end of QE by any means, but I think we need to be aware of what the market is capable of doing whenever the Fed actually sets tapering off as policy. The curve will steepen noticeably, continuing the trend that has been underway since the beginning of May.
Morning Comment
This is the last day of the CUNA CFO Conference and once again it has lived up to its reputation as the premier event in the industry. If you have not had the opportunity to attend yet, please put it on your calendar for next year.
Enough has been said about the string of consecutive Tuesdays where the Dow has marched ahead. Well, not enough actually as I am writing about it now. Yesterday was number 19. If you had been long the Dow only on Tuesday you would have captured half of the total gain for 2013 year-to-date. The Dow didn't really rally that much yesterday (+0.34%), but a gain is a gain. Stocks are up a shade today.
Bond prices rallied yesterday along with equities. The two Fed speakers who were slated to talk were both considered to be in the dovish camp (meaning keep on with QE) and they did not disappoint. St. Louis Fed President Bullard, a voting FOMC member this year, repeated his comfort with the current QE policy and hinted that softer inflation might actually require additional QE from the Fed. Vice Chairman Dudley chimed in with the incisive comment that the Fed might “increase or decrease” QE in the future. Traders decided this was acceptable language and continued to push bond prices higher.
Dudley amplified his comments this morning in a Bloomberg News interview. He suggested that the Fed was 4-5 meetings away from knowing what they needed to do about QE Infinity. Dudley feels that the Fed will have a better idea about the future than they have now, particularly since we seem to have survived the Social Security tax bump and sequester without losing too much momentum. Remember, that this last round of QE has neither a cap nor an ending date. At some point, the Fed is going to have to put a stop to it and that is what has been bugging bond investors since the beginning of the month. After non-farm payrolls surprised to the upside, we endured a series of Fed district Presidents suggesting that QE should at least taper off if not stop altogether. Yields have been moving higher these last couple of weeks. It looks like we’ll be spending the summer handicapping what the Fed is going to do.
Dudley’s comments yesterday and today have taken the edge off Bernanke’s appearance before Congress today. Dudley said that he and the Chairman are very close on policy which means that Bernanke is unlikely to surprise us today. I don’t know if the Fed is consciously spinning this narrative or whether they are just making it up as they go along. To add to the intrigue, Bernanke has already tantalized Fed watchers with his plans not attend the Jackson Hole Fed meeting in August. Then we see occasional articles discretely dropped into the Wall Street Journal. For a Fed that is trying to be transparent they seem awfully coy right now.
The 2-year is opening 0.23%, the 5-year is 0.81% and the 10-year is 1.92%. Early yesterday the 10-year was threatening to cross the 2% mark but it did not as the Fed speeches brought in buyers. I don’t think we’re out of the woods on that possibility, but for now stability is creeping back into the yield curve.
Gold and silver are continuing their rebound from the pounding they endured early in the week. The Yen gained a small bid yesterday but is fading a little this morning as it trades at the 103 level.
Jeff Smith
Director of Investment Sales
SunCorp
jsmith@suncorp.coop
Jeff's comments and insights, based on his professional expertise and the knowledge he has acquired observing the U.S. economy and global markets, are offered as his own personal observations and opinions, and not necessarily reflective of those held by SunCorp, our board or member credit unions. Please do not respond to this message as this e-mail address is un-monitored.
MONTHLY MARKET COMMENTARY
May 2013
GDP growth in the first quarter of the year came in at a seasonally adjusted 2.5%. This was a sizeable improvement from the torpid .4% growth seen in the fourth quarter of 2012. However, the improvement did not meet economist expectations......click here
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