Market Update

The Week Ahead: Fundamental Outlook for March 15 thru March 19, 2010

The Ides of March are upon us. Let’s hope they work out better for us than they did for Caesar. The past week seemed a strange one and one in which it felt like no one had a firm enough conviction to move anything a great deal. There is no question that there are a lot of unresolved economic issues around the world. Or perhaps they have been resolved? No one really knows right now. It has been one year since the Bank of England started the world’s Central Banks on the course of Quantitative Easing. There is no question that the amount of liquidity pumped in was a main driver of the initial equity rally. The big question now seems to be, when this liquidity begins to be withdrawn from the markets, are the existing economic fundamentals strong enough to support the current price levels? On Tuesday the Fed will give us an indication how they view the matter. There are many mid-level announcements scheduled to be released this week; however, for the sake of space and time, I am going to focus on just the items that typically move the markets the most. I will, however, list out each of the mid-level reports on the days that they occur because there is always the possibility that a surprise in them could still generate some volatility.

Monday, March 15

No major US Fundamentals scheduled today.

Mid-Levels:
Empire State
Manufacturing
TIC Long-Term Purchases
Capacity Utilization
Industrial Production

Tuesday, March 16

Building Permits and Housing Starts – Census Bureau – (www.census.gov)

Likely Market Reaction: Both Building Permits and Housing Starts are expected to pull back slightly from last month’s readings. Building Permits are expected to come in around 610K and somewhere in this neighborhood seems like a logical place for them to land. I think where the surprise could come in is on the Housing Starts. It looks like the analysts polled have somewhat built into their forecasts the crazy weather conditions we saw around the country in February. Did they figure it in properly is the question? Perhaps even with snow reported in areas where there is typically no snow, builders did not shy away from the starts and somehow stuck to schedule. If so, and if this number equals or bests the 590K posted last month, equities and the USD both could pop up on this news. On the other hand if they didn’t give Mother Nature’s power enough credit, this number could certainly shock to the downside. If that were the case we would most likely see some pressure on equities, commodities and the USD. In any event, I do think it will be difficult to stay too committed to one direction for very long ahead of the Fed announcement in the afternoon.

Background: This report furnishes us with data regarding the annualized number of new residential permits issued during the previous month as well as all of the new homes started. With a great deal of speculation that the housing market has bottomed, it will be very important to see this trend continue in the right direction. While new homes make up a much smaller percentage of the overall real estate market when compared to existing homes, it is still a very important indicator in the fact new homes require construction crews, inspectors, subcontractors and so the trickle down affect can be great.

FOMC Rate Decision and Monetary Policy Statement – (www.federalreserve.gov)

Likely Market Reaction: It is hard to believe it has already been one year since the Fed moved into the realm of quantitative easing. Will they give us an indication of withdrawing some of that liquidity this time? Perhaps. As far as the current Fed Funds rate, I don’t think anyone is expecting any type of adjustment. Since the last meeting the Fed changed the emergency loan rate from 0.50 to 0.75%. While this in and of itself does not constitute monetary tightening, it was an interesting move. This opens a big window as well. If there is a shock in this report I look for its initials to be TDF; Term Deposit Facility. Currently the Fed Funds Rate, or the rate at which banks lend to each other, is set at < 0.25%. The Emergency Rate is 0.75%. Since the object of the Term Deposit Facility is to allow the Fed to pay interest on money that banks hold there, it makes sense that the interest rate for the TDF would have to be attractive enough to make this happen. That being said, the Emergency Loan Rate has to be high enough that it is still considered somewhat non-desirous to take that loan which is currently at 0.75%. This makes a nice little window where the Fed could tuck the TDF rate at 0.50%. I kind of doubt the Fed will come out and say directly that they are implementing this policy on such and such a date; however, if they do, or hint strongly that this may happen in the near future, hang on to your bonnets! If this scenario plays out, and using the lessons from last Nov. and Dec as a guide when the Fed just tested this facility, I would expect selling pressure on equities in a not at all gentle manner. Commodities too would likely get pushed down. Dollar on the other hand would probably run like a freight train higher, particularly against EUR, GBP, AUD and CAD. My thought though, is that the statement itself will be very carefully worded to avoid a massive market shock, but there is always that chance…

Background: As we saw after the March 2009 statement, the market impact of this release can be both dramatic and immediate but also sustainable. The FOMC is scheduled to meet eight times per year (note: this is not a maximum and in times of economic stress, may meet more) with the goal of providing monetary and economic stability. Through the use of the open market operations, the discount rate and reserve requirement tools, they pursue this goal. Traders and investors pay close attention to any decisions made by the FOMC as these decisions can directly affect short and long-term interest rates, foreign exchange rates and the amount of money and credit in the economy. Through impacting these factors, other parts of the economy such as employment, output and prices of goods and services are also affected. With such a broad impact on the overall economy, any decisions or statements indicating the health of the economy are closely watched and can have both an immediate and long-term impact.

Wednesday, March 17

Producer Price Index (PPI) – Department of Labor– (www.bls.gov)

Likely Market Reaction: Analysts have forecast a 0.2% decline for the PPI this month. This would seem to fall pretty much in line with the pattern we have seen since the November 17 release. Since then, PPI has given us a reading of 0.3%, 1.8%, 0.2% and 1.4%. With a drop forecast in this number, unless it is absolutely terrible to the downside I feel that the market will most likely have priced in the expectation and we will not see too bad of a shift. If the PPI can surprise in the manner that Retail Sales did last week though, we could see a nice little pop up for the Dollar as well as equities. Much of this will depend though if there are any ripples, or tsunami’s, still rolling after the Fed announcement the day before

Background: This report measures the change in price of finished goods and services sold by producers. Because production costs are typically passed along to the consumer it can be a leading indicator of inflationary effects for consumer goods. Over the last few months we have seen this gauge move higher; however, much of that has been attributed to a rise in crude prices. Currently there is a great deal of slack in consumer demand and it seems to be almost a foregone conclusion that this number cannot keep rising without the US consumer getting back into a demand state of mind.

Thursday, March 18

Core Consumer Price Index (MoM) – Bureau of Labor Statistics– (www.bls.gov)

Likely Market Reaction: Forecast is for 0.1% after a -0.1% last month. I am not looking for a lot of movement out of the number this time. If it does remain negative I think we do have some pressure applied across the board; however, I think most already contend that inflation at this point is really not a great concern. That being said, if this number somehow climbs to 0.3% or greater it would definitely provide very fertile ground for a Dollar rally. On the equity and commodity side though, too positive of a report may actually bring on the Bears as traders see this as a sign of potential Fed tightening. Everything though will have to be viewed in context of the Fed’s Tuesday statement

Background: Similar to Retail Sales where we have the overall figures and the Core figures, the CPI data is the same. In the case of CPI, food and energy prices which account for about 25% of the index and tend to be very volatile are removed from the Core figure. This makes the Core CPI a much better gauge of overall inflation and a better way to judge the overall change in the price of goods and services purchased by consumers.

Weekly Unemployment Claims – Department of Labor– (www.dol.gov)

Likely Market Reaction: This number is terrible no matter what happens. Late last year and earlier this year there was a nice trend of declining numbers and most took it as a sign of improvement. And then, BAM! We popped back up into the upper 400’s and realized little improvement had been realized. The forecast is for 456K. If we slip back into the 480K+ range I am not sure if anyone will react or if it will just translate into a disgusted stare at the monitors. It’s really a tough call on which way we go on this one; however, a three digit number starting with the number 3 would be a lot nicer to see than what we have been exposed to lately.

Background: There are the two numbers that traders really focus in on in this report. The first is the headline number for unemployment claims the previous week. The second is the total number of unemployed on an ongoing basis (continuing claims). It is important to note though that the continuing claims number can be a bit misleading in these economic conditions. If you are looking from a macro-economic standpoint, please keep in mind that many states only offer benefits for 26 weeks, after that individuals may be put on extended state benefits or emergency federal funds -- neither of which will be counted in the continuing claims data. As the recession drags on, more people will not be counted in the continuing claims data even though they are still collecting some type of benefit.

Friday, March 19

No major US fundamentals scheduled today.