Yesterday saw some negative pressure for the first time in a few days. A pause possibly after the two day upward momentum and questions remain – a buying opportunity or a place to reconsider long positions? We also saw commodities, silver, gold, and foreign currencies come off some. Bernanke’s testimony was of caution, caution that the U.S. is spending too much too fast. While Geithner was assuring China that our dollars are strong and bonds safe, on the other side of the Pacific, Bernanke was warning our Congress and President that while it might be safe now – if spending is not curtailed we face looming difficulties (ironically he still has many more dollars to print to continue to fund treasuries – something he is probably not too happy about.)
These concerns were echoed by the German Chancellor, Angela Merkel – before today’s ECB rate decision. She leveled concerns that the U.S. spending (bailouts, loans, and printing of money) and that the Federal Reserve must return to fiscal responsibility and not political accommodation.
The market was under pressure, but going into the close call it intra-day short covering or opportunity buying we saw a decent rally in the last 30 mins.
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ECB & London kept rates unchanged
While the ECB and London kept rates unchanged they additionally did not indicate they would expand the debt funding, maybe they listened to Angela Merkel. Analyst have pointed to a combination of the recent weak dollar, stepping long-term yield curves, and the recent rise in Gold as a concern that inflation is around the corner or could be very quickly. While the yields did rally very quickly, it is still only in the 3.5% range – but what they point out is how FAST it did rally. Reflecting that in the future it could be upon us before we know it.
It would seem that London and the ECB are not only listening to the likes of Merkel, but have also seen the signs in the market that while fiscal stimulus is necessary – there unwinding of that stimulus can take time and if that stimulus is massive (as in the case of the U.S.) it can be a daunting task to get inflation under control.
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Initial jobless claims…
As expected they fell by 4,000 to 621,000 in the last week of May, from a revised 625,000 the previous week. Additionally those that remain on unemployment fell slightly to 6.735 million from 6.750 million. Some attribute that it doesn’t necessary reflect that those on unemployment have found jobs, but have just fallen off unemployment (“disgruntled”) and are no longer counted.
The good news is that it is falling and is showing that we are coming to a bottom, however finding a bottom is not “green shoots” of growth – but only that the unemployment has hit bottom. Getting off the mat, the growth or “green shoots”, is the question – not that it will not happen, but rather how fast it will happen. But “less bad news” is spun into good news.
The administration is basing their deficit and forecast on a “V” shape recovery, but most economist forecast show either a “W” shape recovery or a very slow recovery. That means (as the earlier story reflects) that deficit spending must be curtailed.
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Futures Pre-market
The futures were up and started coming off as Asia was down and Europe mixed, the ECB and London rates unchanged sent the futures briefly into the negative territory. The initial jobless claims sent a upside very small knee jerk – but they continue to be mixed (above, below, or at fair value). Expect a mix opening as it seems that Arb traders are sidelined.
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Support / Resistance
The markets came off their highs yesterday but rallied into the close (still negative on the day) – do we make another push to the upside? Could, but the legs are getting a little weak if the futures action is to be given any weight.
INDU 8500 / 8750 (We are currently down from that resistance and had looked weak all day yesterday. The initial jobless claims was inline – but nothing surprising. With no big news today – it could be mixed.)
NDX 1430 / 1500 (The gap down is at 1430 – we had a rally to close almost unchanged on the day after being down 15 points during most of the session. Opening looks flat.)
SPX 900 / 940 (We have had a volatile gap week – which could mean that we get a little retracement .)
RUT 500 / 525 – 550 (We didn’t get to 550 but did top 525. 500 is where we ran from – so volatility could be in the cards from the short fast move.)
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Gold 950+ (We have moved solidly up from the 900 level over the last couple of weeks and yesterday we saw a pull back, but still above the 950 level.)
Silver 15+ (Silver was up above 16 for the first time since August last year. The 17.50 area could see some resistance.)
Oil 65+ (We did see a pull back, but the it is rallying again. JP Morgan forecasts oil prices at 80 by year end.)
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Conclusion
Unemployment numbers come out tomorrow and are expected to reach the 9% level, which is currently on track to reach higher levels than the Administration anticipates based on its deficit and GDP growth and equally importantly the “Stress Test” measurements. While we are seeing a slowdown in the RISE of unemployment, it is still a RISE. That needs to end before we can see the GDP to grow, certainly we are not going to be able to rely on trade to make up the difference and the real wheel is consumer spending (making up 3/4s of the GDP). That means people need jobs, money, and credit to SPEND.
I saw Peter Schiff’s review of Geithner’s trip to China – which upon reflection did seem rather comical (in a sad way). Geithner giving the Chinese economic advice, was analogous of a “F” student giving an “A” student advice on how to study and pass a class. Chinese is not only financing the U.S., but also sit on the massively POSITIVE side of the Trade Balance (they have all our money – as it is shipped over to them). We pay them to lend us more money. What was even more ironic is that Giethner’s advice was about the government spending MORE money to build infrastructure, social security, and health care so that the consumers could SPEND their money (rather than save). Maybe Giethner forgot that China is a Communist nation and that means they all ready do those things – but he is suggesting they do more (spend more). While, Bernanke is warning at the same time we are spending too much and printing money to finance the government spending. Looking at it from that perspective it just seems silly.
The big number tomorrow will be unemployment (while a lagging indicator) everyone will be watching – spun into “less bad news” or “economic reality” will be all based on perception and less on the actual math. The market will move on perception and how we read and absorb the data – however the economy will move independently of market reaction.
There could be some volatility tomorrow.
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