Monday, July 15, 2013

Market Update



There are a number of key economic releases this week, but the major focus this week is Bernanke testifying in the House and Senate on the economy, employment and inflation. Likely he will field a lot of questions from politicians about what the Fed intends to do with its QEs and more grilling on the state of the economy and unemployment that refuses to subside. He goes before the House Financial Services Committee on Wednesday and then to the Senate’s Banking Committee on Thursday.  

At the moment, markets continue to lean towards the Fed beginning to taper as soon as September, but Bernanke is keeping markets on edge by changing is tune from one speech to another.  He has managed to twist interest rate markets into a tight knot with his recent comments, on June 19th saying emphatically that the Fed was preparing to begin removing the Fed’s support of the bond markets by slowing its monthly purchases, that sent interest rates spiking higher, then in a speech early this month retracting a little after he was surprised at the swift increase in mortgage rates. The housing sector being the strongest sector in the economy, mortgage rates increased 5 basis points; the reaction to his remarks early this month stabilized mortgage rates in a narrow range. His testimony this week is critical, he will be grilled hard by members of the committees on the economic outlook and the Fed’s intentions.

Economic data this week includes June retail sales on Monday, June CPI, June reports on industrial production and factory use, and June housing starts and permits.  We expect markets will trade in narrow ranges early this week ahead of Bernanke testimonies. It isn’t wise now to anticipate that interest rates will decline much. Maybe Bernanke can swing the outlook to a more positive outlook, but if that were to occur he would have to imply the Fed will not begin tapering until next year.

A lot of focus these days on China and the slowdown that continues, but this morning their GDP expanded 7.5% in the second quarter, its economy expanded 7.7% in Q1. China is slowing but obviously still a lot better than here in the US. The GDP report pushed Europe’s stock markets better. U.K. home sellers raised asking prices for a seventh month to a record in July, according to Rightmove Plc, which said values will increase twice as much as previously forecast this year.

There is an increasing number of bullish comments that rates may decline a little more from present levels; I am not arguing against that thought, there is some logic behind it but until the market itself demonstrates it will hold to out bearish outlook based on price action, not comments.

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- Michael Corboy

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