Something You Don't Know
The theme with markets and traders this week is a focus on whether or not the market has a clue. I’ve seen several interesting articles on the topic this morning already, including one cleverly titled in Barron’s: (Barrons Online - Promises, Not Problems, Occupy Markets). The stock market’s disregard for a devastatingly weak jobs report deserves some speculation, as does the fervor with which it has recently rallied. Being from the fixed income side, I hesitate to think the stock market may actually know something the rest of us don’t. Still, it would be nice if it did.
As pointed out this morning in the Journal, (WSJ.com - It's Starting To Look a Lot Like November) the hallmarks of a bear market rally are still evident. Although we have stronger drivers than what spurred the bear rally in November, we have reached a similar turning point. This will be a tell-tale week as first quarter earnings releases begin.
On the bright side, if this is just another happy bear, there is mounting evidence that the market has begun forming a solid foundation. It’s one thing to rally with no redeeming data to inspire it and another to rally briefly with some sturdy support. The week before last we got signs of improvement from home sales, Richmond Fed, durable goods orders, and University of Michigan consumer sentiment. Last week we saw improvement in auto sales, pending home sales, and manufacturing.
This week we have our eyes on market reaction to Treasury issuance (just announced: $35B in 3 yrs and $18B in reopened 10 yrs Wednesday, after $6B TIPS auction tomorrow), Fed buying ($2.35B in 10-17yrs today), and earnings releases. For data, we have consumer credit tomorrow, wholesale inventories on Wednesday, new and continued jobless claims on Thursday, and the budget deficit on Friday.
My forecast is for some more bottom-forming/foundation building in equities. And that could mean we bottom again. I’m not ready to be bearish fixed income on the same token, in spite of more issuance. The Fed is determined to ease credit and the foundation building process should fuel a flight to safety. However, the historical inverse relationship as we know it is slightly off kilter (I love talking about the tug-of-war between equities and treasuries, especially when it’s thrown off). Today is a perfect example. Treasuries are selling off with equities. Also, why did treasuries sell off across the curve after such a dismal jobs report? Because job losses are a lagging indicator? It being baked in or worry about inflation caused by quantitative easing is kind of stale. Although I don’t think the market is done, I do think it’s possible that market psychology is beginning to change. We already know ‘not bad’ news is enough. For all rights and purposes the inverse relationship is still there because equities are not going to be allowed out of the cage until rate market intervention is not absolutelynecessary to facilitate market functioning. Intervention alone should be considered ‘bad news.’ You know, Fed buying (etc.) supports fixed income, which holds rates down, which encourages borrowing, which scoots confidence in equity markets. At least, that’s what they hope is the consequence.
I think the fact that the equity market can rally with a partial inspiration from easing mortgage rates is a red herring. While rates are eased synthetically there is still the air that markets cannot function on their own. Whether they ever will again is another story but I don’t long for the days where I have to search for something to write about.
As pointed out this morning in the Journal, (WSJ.com - It's Starting To Look a Lot Like November) the hallmarks of a bear market rally are still evident. Although we have stronger drivers than what spurred the bear rally in November, we have reached a similar turning point. This will be a tell-tale week as first quarter earnings releases begin.
On the bright side, if this is just another happy bear, there is mounting evidence that the market has begun forming a solid foundation. It’s one thing to rally with no redeeming data to inspire it and another to rally briefly with some sturdy support. The week before last we got signs of improvement from home sales, Richmond Fed, durable goods orders, and University of Michigan consumer sentiment. Last week we saw improvement in auto sales, pending home sales, and manufacturing.
This week we have our eyes on market reaction to Treasury issuance (just announced: $35B in 3 yrs and $18B in reopened 10 yrs Wednesday, after $6B TIPS auction tomorrow), Fed buying ($2.35B in 10-17yrs today), and earnings releases. For data, we have consumer credit tomorrow, wholesale inventories on Wednesday, new and continued jobless claims on Thursday, and the budget deficit on Friday.
My forecast is for some more bottom-forming/foundation building in equities. And that could mean we bottom again. I’m not ready to be bearish fixed income on the same token, in spite of more issuance. The Fed is determined to ease credit and the foundation building process should fuel a flight to safety. However, the historical inverse relationship as we know it is slightly off kilter (I love talking about the tug-of-war between equities and treasuries, especially when it’s thrown off). Today is a perfect example. Treasuries are selling off with equities. Also, why did treasuries sell off across the curve after such a dismal jobs report? Because job losses are a lagging indicator? It being baked in or worry about inflation caused by quantitative easing is kind of stale. Although I don’t think the market is done, I do think it’s possible that market psychology is beginning to change. We already know ‘not bad’ news is enough. For all rights and purposes the inverse relationship is still there because equities are not going to be allowed out of the cage until rate market intervention is not absolutelynecessary to facilitate market functioning. Intervention alone should be considered ‘bad news.’ You know, Fed buying (etc.) supports fixed income, which holds rates down, which encourages borrowing, which scoots confidence in equity markets. At least, that’s what they hope is the consequence.
I think the fact that the equity market can rally with a partial inspiration from easing mortgage rates is a red herring. While rates are eased synthetically there is still the air that markets cannot function on their own. Whether they ever will again is another story but I don’t long for the days where I have to search for something to write about.
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