The Nitty Gritty Details:
Markets are looking ahead to this afternoon’s FOMC policy statement and subsequent Bernanke press conference. Earnings news is mixed this morning, with an upbeat report from a major global shipper lifting its shares while a disappointing outlook from a well-known software provider is weighing those shares down. Meanwhile, shares of a significant electronics manufacturer (a barometer of technology production) are higher despite tepid guidance after a share buyback announcement. Overseas, Europe is down slightly as miners are weighed down by lower metal prices and a profit warning emerged from an electronics provider, while Japan closed solidly higher and Hong Kong finished flat. Commodities are mostly lower amid a weak dollar and overall market weakness, though natural gas and livestock are bucking the trend with solid gains.
Looking back at Tuesday, optimism that the Greece Prime Minister would survive last night’s confidence vote and enact austerity measures to secure more aid helped stocks continue their modest recovery. Tuesday marked the fourth straight day of gains for the S&P 500, lifting the index 2.4% above its June 15th low at 1265. Overseas gains helped the tone, while markets got little help from a quiet day of economic and company news. Broadly higher commodity prices amid a weakening dollar pushed the Materials sector to the top of the sector rankings with a more than 2% gain, while Consumer Discretionary and Technology outperformed as well on a day where investors strongly favored cyclicals. Natural gas, silver, wheat and livestock were among the biggest gainers in the broad-based commodity rally. U.S. crude increased nearly $1 to over $94.
Around our financial planning services firm this morning, we were discussing three items that we thought would be of particular interest to our readers:
The Markets Broken Down:
1. Here’s the FOMC “preview.” The market expects the Fed to end QE2 at the end of the month, but signal that it will maintain the size of its balance sheet for the foreseeable future to continue to provide support to the economy. The FOMC statement will likely acknowledge the recent soft spot in the economy, the transitory nature of commodity prices and maybe even the recent uptick in the pace of core inflation. The FOMC will release a new forecast for 2011, 2012, and 2013 today and Fed Chairman Bernanke will hold a press conference subsequent to that. Bernanke will likely be questioned about the pace of the recovery (and what else the Fed can do to hasten it), the end of QE2, the fiscal situation in the U.S. and in Greece, and maybe even the Fed’s stance on inflation targeting.
2. Metro economies struggling the most to recover from the Great Recession typically lost government jobs, a new Brookings Institute report found. 12 of the 20 weakest performing metro areas in the first quarter shed public sector jobs since the recession ended. Prominent on this list are: Chicago, Las Vegas and Pittsburgh. Many of these struggling metro areas have other problems, such as falling home prices and rising unemployment overall. Loss of government jobs has simply “added on” to those woes. State and local payrolls have shrunk by an average of 23,000 jobs a month over the past three months, while federal payrolls have stayed essentially flat. Meanwhile, the private sector has created an average of 180,000 a month during the same period. It appears the worst is yet to come. State and local governments are forecast to shed up to 110,000 jobs in the third quarter according to IHS Global Insight, which would be the first time that over 100,000 jobs are lost in just one quarter.
3. America’s number one creditor appears to be losing some appetite for U.S. government securities. In a report issued yesterday by Standard Chartered, the bank argues that the Treasury Department’s official system for tracking U.S. debt is “misleading” because of the way it tracks transactions. Often China will buy assets through brokers in London and Hong Kong and the Treasury International Capital data (TIC) is based on where the orders were booked, so it doesn’t fully capture all of China’s purchases. China’s foreign exchange reserves expanded to $200 billion during the first four months of this year, with the bulk of it being used to buy European debt. The report estimates that China bought about $3.6 billion worth of top-rated bonds issued by the European Financial Stability Facility, which is backed by members of the European Union. Even if Beijing were not concerned about the U.S. fiscal situation and/or the U.S. dollar, the yields on offer would likely to be attractive enough for it to diversify into Europe at the margin. Despite this recent trend, China remains by far the largest holder of U.S. debt.
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.
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