As tax day rapidly approaches, the government was stuck in trying to provide enough funding for itself to carry on the “business of the people”. One of the issues at hand is trying to cut the deficit, debating how much and from where. Unfortunately the discussion is about the crumbs surrounding the government pie instead of actually cutting the pie. Depending upon how cynical you are, the government shut down could have been a good thing, unfortunately congressmen would still get paid – your tax dollars hard at work! The shut down would have eliminated much of the economic reporting that would have occurred this coming week, however investors may be watching earnigns season a bit more closely, trying to determine whether margins will be under pressure from higher commodity prices, whether sales will be expanding at a quick enough pace to satisfy some of the high growth estimates and finally, what are the expectations about future growth. Congress has bought themselves some more time…hold onto your pocketbook!
Stock trading has already begun the summer doldrums as overall volume slows to a snails pace last week. The excitement is centered in the commodity complex as precious metals hit new highs, energy prices put in their daily gains and the Fed chief can not really see any inflation pressures lasting beyond a “transitory period”, however the pain at the gas pump may be enough for consumers to keep the car in the garage for much of the summer. The SP500 has been struggling to clear the 1330-1335 area that marked the early March highs. Judging by the market internals, stocks should get over that hurdle and begin a more serious journey toward the 2007 peaks that may happen as the Fed’s easy monetary policy comes to a close at the end of June. The market internals continue to be relatively strong, pointing to decent buying underneath the markets. The corrections that have been coming have all been short and relatively shallow and should continue that way through the end of the second quarter. Once the Fed steps aside, all bets will be off.
Interest rates are rising around the world, China has increased rates four times already this year and the European community took what is seen by many as a bold move, by hiking rates while many European countries struggle to stay afloat. In a rare move ahead of the Fed, the European Central Bank acknowledged they are trying to quell the rising inflationary trends in commodity prices that have seen the CRB index rise by nearly 9% already this year. Our bond market is responding a bit, with long-dated bonds falling (yields rising) and pushing our bond model into negative territory for the first time in two months. As long as commodity prices streak higher, bonds should remain weak.
