Market Praying For QE3
Saturday, April 07, 2012
The release of the Fed’s minutes removed the hope of QE3, which had been raised by Bernanke the previous week. At least, that is how the market interpreted it, and the reality is that the Fed continues to provide mixed messages in its quest for perfection. The question is whether this market is driven by earnings or money printing exercises, and the latter appears to be the catalyst. Interest rates shot up without a promise of further easing, and then retreated due to economic weakness and the European ongoing saga.
Total vehicle sales are running 10% above one year ago, but dropped considerably, or 4.6%, from the previous month, while the ISM Non-Manufacturing dropped slightly to 56 from 57.3. The unemployment rate is now a more politically palatable 8.2%, although the labor participation rate continues to decline because fewer people are in the job market. As pointed out before, if the participation rate keeps declining, the unemployment rate will be 5% by election day, although the underlying job conditions will not match the pretty number.
U.S. consumer credit was short of expectations, expanding $8.7 billion against a forecast of plus $12.5 billion. The unusual item was that student loans were virtually flat, having increased 34% over the preceding 12 months.
GLOBAL: China’s PMI is strong according to the official reading, and weak per HSBC’s survey, and the promised land is slowly becoming increasingly more of a mirage, as outlined in the recent article, “China's Background Noise Getting Louder.” Europe’s GDP contracted slightly (-0.3%), the first negative reading since October 2009, and unemployment increased another 0.1% to 10.8%, the highest level since the euro was introduced. Greece’s April 4 deadline for holders of Greek international law bonds to participate in the debt exchange was moved to April 20, and, on that date, the Greek government will tell us how they plan to handle the banking recapitalization.
Spain was the talk of the town all week, and while we’re told that economic conditions are getting better, or at least stabilizing, the truth always manages to emerge, with the European debt solution becoming a project that will take a generation to unravel. The Spanish Debt/GDP ratio is on track to rise from 68.5% to 79.8% in 2012, with no end in sight, and talk of additional bailout funds for Greece and Portugal are making the rounds. The ECB left rates unchanged and the chief sees inflation below 2% in 2013, although deflation is not the end result, leaving many puzzled as to whether European economics will be cooked to perfection in such imperfect environment.
"The key thing here is the weakness of the (European) peripherals seems to be seeping into the core and that's a real worry," Marcus Ashworth, Head of Fixed Income at Espirito Santo, said.
Australia’s trade deficit was characterized as a surprise, as exports fell a seasonally adjusted 2% from January and imports dropped 4%, further highlighting global weakness, especially Asia.
TRENDS: Lack of a QE3 assurance took its toll, contributing to the short-term neutral readings for the major indices, with the Russell 2000 turning negative. However, the long-term picture remains unchanged, and the positive trend is alive and well. The dollar index moved back above 80 and turned short-term positive, and the euro is close to $1.30, resuming its negative short-term trend. The yen is neutral, and is now benefiting from the safe heaven status, after the hard drop that it has endured since the beginning of the year.
Gold moved lower to $1,630, and although it is still in what can be called a holding range, the metal is at the mercy of the currency game, and is only up 4% for the year. Oil had its swings, highlighting conflicting sentiment about economics and geopolitical risk, and both WTI and Brent ended the week with a short-term negative trend. The interest rate world saw the 10 year treasury dropping to 2.18%, or virtually unchanged from last week, with Friday’s unemployment report adding to the positive trend. However, and while the S&P futures point to a much lower Monday, the talk of QE3 is bound to resurface – and we shall dance to the loudest tune of the day.