Federal Reserve Chairman Bernake is on Capitol Hill today, the first leg of his two-day testimony on monetary policy and the economy. The “Senate leg” of the testimony began this morning, with tough questions expected on QE2, inflation and the economic recovery. Even tougher questioning could come tomorrow when he presents to the House. The Chairman will likely “chime in” on Congress’ lack of substantive progress in addressing the nation’s budget deficit. As far as the markets are concerned, the focus will remain on the Middle East and North African unrest and the subsequent impact on oil markets. Both Brent and West Texas Intermediate crude are up nearly 1% this morning with escalating tensions in Iran and some in Saudi Arabia garnering attention. Overseas equity markets are mixed after China’s PMI decelerated as expected. Japan and Hong Kong are higher, but the European DAX is lower.
Looking back at Monday, stocks overcame some afternoon selling pressure to end Monday’s session with modest gains, securing the sixth straight positive month for both the S&P 500 and the Nasdaq, and the third straight for the Dow. February gains for the major averages ranged between 3.4% and 4%. Though some weakness in the Tech sector weighed on the averages intra-day, all ten S&P sectors still managed to finish in the green, led by interest-rate-sensitive Telecom, Utilities and REITs. The day’s economic data was not particularly noteworthy, with slightly weaker consumer spending and a modest drop in pending home sales.
Around our financial planning firm this morning, we were discussing five items that we thought would be of particular interest to our readers:
Bahrain could be the “canary in the coal mine” this morning. Increasing attention is being paid to the protests in Bahrain and rumors that Saudi Arabia is sending tanks in to that country to quell the protests. Bahrain is connected by a causeway to Saudi Arabia and similarly has a large Shiite population with a Sunni ruling family. The markets are watching Bahrain as an “indicator” to see if the wave of unrest is likely to enter Saudi Arabia, which would be an enormous event, or if it bypasses it. The Saudis are increasing domestic aid by $40 billion in an effort to avert an uprising.
This week’s barrage of economic data and policy events continued overnight and into this morning. Weekly retail sales fell 0.5% week-over-week in the week ending February 26th, but sales are still up 3.3% year-over-year, a reading that is in line with sales gains seen during the 2002-2007 economic recovery. Sales were negatively impacted by rising gasoline prices, but warmer and drier weather provided a boost. Chain store sales for all of February will be reported on Thursday. The market is looking for a 2.5% to 3% year-over-year gain in same-store sales in February.
Municipal high-yield bonds are yielding more than taxable high-yield bonds for the first time ever. The average 7.2% yield of the Barclays High-Yield Municipal Index is greater than the 6.8% yield of taxable high-yield bonds as measured by the Barclays High Yield Index. Yields on specific investment products will vary, but this is the first time the yield of the municipal high-yield index, in its relatively short history since 2004, has eclipsed the yield of its taxable high-yield counterpart.
High-quality bonds finished February on a strong note due to flight-to-safety buying. Treasuries rallied early last week on Middle East turmoil but managed to maintain gains even as equities recovered. Concerns over the growth consequences of $100/barrel oil and the related impact to Europe (the majority of Libyan oil goes there) caused peripheral European government bonds to underperform on the week. The modest increase in European debt concerns also benefited Treasuries.
Similar to corporate bonds, high-quality municipals lagged Treasuries but still rose in price for the week. The average 30-year AAA-rated municipal yield closed below the key 5% level for the first time since early January. For the month of February, municipals outperformed high-quality taxables by roughly 1% according to the Barclays Index data.
As always, email me here with your questions or comments. I love to hear from you and thoroughly enjoy the “intellectual debate” with our clients and friends that these opinions generate.
Greg Powell, CIMA
Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.