Daily Market Reports | Dec 16 2010
By Greg Peel
The Dow fell 19 points or 0.2% while the S&P dropped 0.5% to 1235 and the Nasdaq lost 0.4%.
Wall Street had a raft of economic data to contend with last night, beginning with the consumer price index.
With QE2, the Fed is attempting to fight deflation. The November CPI result brought this battle to the fore. Both the headline and core CPIs rose only 0.1%, taking headline inflation to 1.1% annualised and core (ex food & energy) to 0.8%. The Fed focuses on the core, and its target zone is 1-2%. Clearly we're not there yet, and indeed such inflation readings are the lowest in 50 years.
The good news is that industrial production rose 0.4% in November having fallen 0.2% in October. Economists had expected a rise of only 0.2%. The bad news is that the National Association of Homebuilders' housing market sentiment index remains fixed at 16 this month. At least it didn't decline, but this is a 50-neutral index. The last time sentiment was in the positive range above 50 was in April 2006.
There was more good news in that following a big drop last month, in contrast to other Fed regions, the Empire State (NY) manufacturing index jumped 22 points from minus 11 to plus 11. Statistical error?
All up, the net news was good. Industrial production and Empire index were good, the housing index was at least not more bad, and the CPI result was bad and thus good because it means no end in sight for QE2. On that basis, the Dow was up over 40 points by late morning. But have we seen this movie before?
Come lunch time the sellers moved in again – a bit earlier this time. This time was not so much a case of simply losing momentum, but a direct response to a jump in the US dollar. The jump in the dollar was a result of a drop in the euro.
Last night Moody's announced it was reviewing its credit rating for Spain, with a possible downgrade pending. Belgium is also under watch. While no great shock, such announcements revive global unease with regards to Europe. The euro ultimately fell 1%, sending the US dollar index up 1% to 80.23.
The US ten-year bond yield had been up 9 basis points to 3.56% but on the European news slipped back to 3.52%. When Europe falters, risk money flows back into the safety of US Treasuries (which is one of life's great ironies). But it is US bonds which are causing Wall Street a lot of heartache at present.
The bulls point to rising long bond yields as a sign of an improving US economy. But if money is flowing out of bonds, where is it going? The Fed wants it to go into equities and equities have indeed pushed higher, but it's one hell of a graft. The problem is the bears' interpretation of rising bond yields. They see rising inflation expectations. And while a little bit of inflation is good for stocks, a lot is bad as inflation undermines capital and yield returns. And rising long bond rates are pushing mortgage rates higher at a time when house prices are again teetering.
America is once again on the horns.
The ultimate rise in the US dollar had a predictable effect on commodities. Base metals fell 1-3% in London while gold dropped US$14.90 to US$1381.00/oz. Oil nevertheless managed to rise US67c to US$88.95 following a weekly inventory report in the US which showed a bigger than expected drop.
The Aussie was sticking its head above parity again on Tuesday night but last night fell over a cent to US$0.9858.
The SPI Overnight fell 13 points or 0.3%.
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