The Nitty Gritty Details:
Wall Street opened slightly higher this morning ahead of the start of the Federal Reserve’s policy meeting and tomorrow’s first-ever post-meeting press conference by Chairman Bernake. The earnings news this morning has been mostly good, with several large corporate players rallying on generated results. Today’s economic calendar is quiet, including just the Conference Board’s April consumer confidence and the S&P/Case-Shiller home price index for February. Foreign markets are mixed, with Europe higher and Asian stocks pulling back on a strong yen and concerns about tighter monetary policy in China. Most commodities are about a half percent lower this morning, although silver is down more and coffee and cocoa are higher.
Looking back at Monday, stocks fell, breaking a three-day winning streak for the S&P 500. In the absence of positive headlines, better-than-expected new home sales were not enough for the bulls to push stocks through February highs. Concerns about China applying more pressure on the brakes weighed on commodity prices, as copper fell sharply and oil gave up early gains to close around $112 despite a slight dip in the dollar. Technology topped the sector rankings (but with just a 0.2% gain), while Financials and the resource sectors lost the most ground. Higher input costs weighed on Consumer Staples performance. On the commodities front, gold, silver and grains were solidly higher, while energy, copper and livestock fell.
The Markets Broken Down:
Around our financial planning firm this morning, we were discussing four items that we thought would be of particular interest to our readers:
- The bond market focus will fall on the FOMC meeting and Treasury auctions this week. The two-day FOMC meeting kicks off today and will likely keep Treasury action muted. Tomorrow’s FOMC announcement will come early at 12:30 ET to accommodate Fed Chairman Bernake’s first post-FOMC news conference which will begin at 2:15 ET. Treasury auctions conclude Thursday with the 7-year note auction. The shorter term auctions typically do not disrupt markets, but any softness in demand could push yields back towards the upper-end of the range.
- Earnings season has been supportive of corporate debt. Roughly one-third of S&P 500 companies have reported and, on balance, first quarter earnings season has been positive with 76% of companies reporting beating expectations. A similar ratio of companies have surpassed on revenue expectations as well. Earnings results continue to support the stable-to-improving credit quality theme. It appears that good credit quality should continue to power corporate bond outperformance relative to Treasuries going forward.
- Growth concerns continue to support high-quality bonds. Talk of austerity in the United States, through a combination of tax-rate hikes and spending cuts, has fueled concerns over future economic growth. Rising input costs, the coming end of QE2, and a modest resurgence in European debt fears have also weighed on investor growth expectations. The 10-year Treasury yield of 3.35% is at the low end of the recent 3.20% to 3.60% range in response.
- Municipal bonds post a strong outperformance. Relative to Treasuries, municipal bonds posted their strongest week of outperformance since early February when the municipal bond market was recovering from a severely oversold condition. Municipals managed to outperform Treasuries on two up-days last week, and last Wednesday municipals bucked the trend of weaker taxable bond prices to close the day higher. Average 10-year AAA-rated municipal yields declined by 0.11% for the week, while the 10-year Treasury yield declined by only 0.01%.
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
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