Zero Is No Longer Exceptional
Today was another Fed Day. To no great surprise, the Federal Open Market Committee kept interest rates unchanged. The only speculation was how and if the policy statement would change since the last meeting. Traders specifically wondered whether the FOMC would maintain its forecast of “exceptionally low” rates for an “extended period.” For today the answer was “yes,” but at some point they will have to change this language. The near-zero Federal Funds rate becomes less and less “exceptional” as the period gets more and more “extended.”
The statement sounded slightly positive on the economy. The committee noted that activity in the housing sector has increased and household spending appears to be expanding. These were balanced by the usual assortment of negative indicators that left it unclear what the folks at the Fed really think. Most likely they are as clueless as anyone, but of course they can’t admit it. The 3Q GDP gain of 3.5% is far less impressive when you back out one-time stimuli like Cash for Clunkers and the first-time homebuyer tax credit.
This Friday brings the monthly payrolls report which is estimated to show the unemployment rate jumping to 9.9%. A break to 10% is possible. Like most round numbers, this would be of mostly psychological importance – but still important. Consumer confidence will be a key component of any recovery. If holiday sales forecasts by retailers are anywhere close to accurate, consumers are far from a return to their free-spending ways.
Bond yields jumped on the Fed news with the ten-year Treasury closing today at 3.546%. This is near the top of the recent trading range. The Fed has completed its $300 billion Treasury purchase program. At the same time, much of the money the Fed is providing to banks on such favorable terms is probably finding its way back into the Treasury market. Now the question is when – and how – Ben Bernanke intends to withdraw the money he has pumped into the economy. Our guess is that it will not be anytime in the near future. Both Bernanke and the Obama administration seem happy to let the dollar crater. We think the Fed will remain accommodative until it sees much more definite signs of consumer recovery.
Gold hit yet another new high today. India made some waves with a big (200 tons) bullion purchase from the International Monetary Fund this week. Traders think China may feel compelled to add to its own reserves. Gold mining stocks, however, have not yet touched new highs, and in fact are still below their October level and far below their 2008 peak. The movement in gold and the U.S. dollar is becoming sort of a chicken-and-egg problem. Most of the time gold goes up when the dollar goes down, and vice versa. In recent days we have seen some exceptions to this rule with both going up together. This suggests gold may be responding to fundamental supply-and-demand pressure more than some people think.
This week’s sector rotation resulted in a huge jump for Consumer Staples in our relative strength rankings. The traditionally defensive sector was nearly unchanged for the last five days, but this was much better than all the other sectors. Energy managed to hang on to the top spot despite a stressful and volatile week. Utilities flipped negative, joining Telecom in the red zone. Financials and Health Care are on shaky ground and could do likewise soon.
If Large Cap Growth and Mega Cap would swap positions, our Style rankings would be perfectly aligned from biggest to smallest and from Growth to Value. The three Small Cap groups and Micro Cap all entered negative trend territory, indicating a move away from risk and toward stability.
All global stock markets fell in the last week amid recovery in the greenback. The top two spots were unchanged with Latin America and Pacific Ex-Japan still in first and second place. The U.K. climbed into the #3 spot, helped by strength in the Pound. The Pound and Yen were the only two major currencies to gain on the U.S. Dollar this past week. The Yen move was not enough to help Japanese equities, which are still in last place among the markets we track. Canada also turned negative.
The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.
“At this rate [+3.5%], we wouldn’t reach anything that feels like full employment until well into the second Palin administration.”
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