The Nitty Gritty Details:
Stocks opened higher despite last night’s news that Moody’s had put the U.S. AAA credit rating on review for possible downgrade. Stocks are getting support from better-than-expected results from a major global financial institution as well as lower jobless claims and an increase in retail sales. Early gains also suggest the market remains confident a deal in Washington will be struck before August 2nd. European markets are lower in mid-day trading overseas despite news that Italy agreed to an austerity plan, while key Asian markets moved little to close mixed. Commodities are mostly higher, with particular strength in silver, crude and soybeans. Crude is up about 60 cents to near $99, while gold reached a new all-time high at $1594 overnight before pulling back slightly.
Looking back at Wednesday, strong Chinese GDP data and comments from Fed Chief Bernanke gave stocks a boost. At one point the broad averages were up more than 1% before pairing gains into the close on concerns about Friday’s European bank stress test results. Otherwise, it was a relatively calm day in the markets despite little progress putting the market’s primary concerns to rest (the U.S. budget battle and the European debt crisis). The resource sectors led on broadly higher commodity prices, boosted by Bernanke’s comments as well as a weak dollar; meanwhile, only Telecom and Utilities finished in the red.
Around our financial planning services firm this morning, we were discussing four items that we thought would be of particular interest to our readers:
The Markets Broken Down
1. Bernanke lowers the hurdle a little for QE3, but it remains high. Although Fed Chairman Bernanke in his semi-annual monetary policy address to Congress did outline measures the Fed could take if deflation neared or growth slowed more that the Fed expects, our view remains that the hurdle for QE3 remains high. In August 2010, when Bernanke hinted at QE2 (which began in November 2010), he noted that growth was weak and deflation was a threat. In yesterday’s testimony, while Bernanke did note that growth had slowed (albeit due to temporary factors), there was no concern over deflation. We think the message from the Fed was that if the economy deteriorates, the Fed would be prepared to act. Until then, the clear message to markets was that the Fed is on hold for a long period of time.
2. There is a “mixed bag” of economic data this morning. While weekly initial claims for unemployment insurance fell to their lowest level in three months in the week ended July 9th, and producer prices fell in June, retail sales were tepid. On balance, this morning’s economic data were consistent with tepid growth in the second quarter, but did offer some hint (the drop in claims) that the long awaited “bounce” in economic activity in the third quarter may be near.
3. No progress in the debt ceiling talks. President Obama met with congressional leaders for a fourth consecutive day at the White House yesterday, but reached no agreement that would allow Congress to raise the debt ceiling. Talks continue today. Our view is that Congress will pass a deficit reduction package (spending cuts and some revenue increases) that will cut between $1 and $2 trillion from the deficit over the next 10 years, and that would allow the debt ceiling to be raised by the same amount, essentially “kicking the can down the road” until after the 2012 elections.
4. The bond market largely “shook off” Moody’s rating action yesterday as yields increased only modestly. The rating agency placed the U.S. AAA credit rating on review for a possible downgrade given increased risk of a missed debt payment should Congress fail to increase the debt limit by the August 2nd deadline. Five-year credit default swaps (CDS) increased to 55 basis points, but the low cost of protection reflects the market’s perception of only a small probability of default. The rating action comes as little surprise, given Moody’s warning on June 2nd that rating action was likely by mid-July unless progress was made on debt limit negotiations.
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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