Thursday, May 30, 2013

Markets rise on bets the Federal reserve will continue buying bonds

Dow finished up 21, advancers ahead of decliners 3-2 & NAZ was up 23.  MLPs continue weak, taking the index down 7+ (a very big move) to 449s & the REIT index dropped 3+ to 289.  Junk bond funds rebounded after yesterday's losses while Treasuries were volatile, little changed by the end of the day.  Oil rose on signs the US economy will need stimulus.  Gold climbed to a 2-week high on speculation that the Federal Reserve will maintain bond purchases.

AMJ (Alerian MLP Index tracking fund)

stock chart 

Treasury yields:

U.S. 3-month


U.S. 2-year


U.S. 10-year


CLN13.NYM...Crude Oil Jul 13....93.60 Up ...0.47  (0.5%)

Live 24 hours gold chart [Kitco Inc.]

Draghi Speech About Euro Crisis, Economy, Markets

Photo:   Bloomberg

Economic confidence in the euro area increased in May, adding to signs the region is beginning to emerge from the longest recession in the € era.  An index of executive & consumer sentiment rose to 89.4 from 88.6 in Apr, the European Commission said today, in line with the median estimate.  The contraction has left the ECB to try to mitigate the damage by cutting interest rates & exploring unconventional ways of channeling money to needy companies, especially in the south.  The ECB this month cut its benchmark rate to a record low of 0.5%.  “Our measures gave breathing space from markets driven by panic, which were forcing the economy into a position where inappropriately high interest rates would make default a self-fulfilling prophecy,”  Mario Draghi said earlier this month.  “Today we are seeing some encouraging signs of tangible improvements in financial conditions. Spreads in sovereign and corporate debt markets have narrowed considerably.”  A gauge of sentiment among European manufacturers increased to minus 13 from minus 13.8 in Apr.  An indicator of services confidence climbed to minus 9.3 from minus 11.1, while consumer confidence improved to minus 21.9 from minus 22.3.  The economy contracted 0.2% in Q1.  Today’s economic-confidence report followed a May 16 trade report that showed euro-area exports rose 2.8% in Mar & the trade surplus widened to €18.7B ($24B).  EU car sales rose in Apr for the first time since Sep 2011.

Average U.S. rates on fixed mortgages jumped this week to their highest levels in a year, signaling slightly higher costs for homebuyers.  But rates still remain low by historical standards.  Here's a look at rates for fixed & adjustable mortgages this week & over the past year:

Current avg. Last week 52-week high 52-week low
30-year fixed 3.81% 3.59 3.81 3.31
15-year fixed 2.98% 2.77 2.98 2.56
5-year adjustable 2.66 2.63 2.84 2.56
1-year adjustable 2.54 2.55 2.79 2.52

Rising rates on the 10 year Treasury are bringing higher mortgage rates which could slow the housing recovery.

Average US mortgage rates jump to year high AP

A man pushes his shopping cart down an aisle at a Home Depot store in New York, July 29, 2010.REUTERS/Shannon Stapleton

Photo:   Yahoo

A drop in gov spending dragged more on the US economy than initially thought in Q1, although consumer spending looked relatively resilient to the federal gov's austerity drive.  The jobless claims along with a report that contracts on previously owned homes climbed to a 3-year high in Apr, point to an economy that has held up reasonably well despite gov constraints, but nevertheless faced headwinds severe enough to dissuade the Federal Reserve from trimming its monetary stimulus in the immediate future.  Federal gov spending tumbled at a 4.9% annual rate, which was faster than the 4.1% rate initially estimated.  Also holding back growth, businesses outside the farm sector stocked their shelves at a slower pace.  DC has been tightening its belt for several years but ramped up austerity measures in 2013, hiking taxes in Jan & cutting the federal budget in Mar.

Stocks continue to be hot.  Following yesterday's retreat, Dow is back within a heartbeat of setting another new record (although it sold off in the last ½ hour).  Dow is up 2.2K (17%) YTD which would on its own right qualify as an outstanding year.  Meanwhile, GDP grew at an unsatisfactory rate in Q4 & in Q1 of this year, the growth rate was cheerless.  Even with more favorable reports coming from the euro zone, the southern countries in Europe still have huge economic problems to solve.  The growth rate in China is getting less attention.  But a new leadership is facing an economy with its slowest growth rate in years.  The relative strength of the US economy is surprising led by the consumer sector which has been coping with higher taxes & federal budget cuts.  Dow wants to work its way higher. However the recent sell-off of yield securities (MLPs & REITs) may signal headwinds ahead.

Dow Jones Industrials

stock chart

No comments: