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Q2 Ready to Close

06/21/2013

In the wake of Wednesday’s FOMC meeting the S&P 500 Index (SPX) resumed the corrective behavior of the past few weeks. In fact Thursday’s 1588.19 SPX did violate the previously identified important support level at 1597.35.

Unfortunately, I expect risk assets will continue to trade in frustrating capacity. There is no evidence in the near term to suggest Institutional money flows that have left risk assets over the past few weeks will return.

From the SPX (Figure 1.1) May 22 high at 1687.18 the correction now stands at 5.9%. Below the market the 100-day moving average at 1577.68 seems the likely next target for the SPX. A break below there clears a path toward 1536, which is viewed as a strong support level from April. A retreat to 1536 equates to an 8.95% correction. For those tracking the 200-day moving average it now rests at 1506.03.

The 10-year U.S. Treasury (Figure 1.2) appears positioned to elevate above 2.50%. What I viewed as a far more hawkish FOMC on Wednesday failed to provide the markets with enough clarity that the yield spike is being fueled by growth acceleration expectations.  They acknowledged deflationary pressures but labeled them as transitory.

Ultimately I suspect the decline in both Treasuries and Equities is a vote by the investment community that it is suspicious the FOMC is about to make a "policy mistake" - reducing the monthly asset purchase program based on "expectations" of accelerating growth rather than reacting to solid evidence.

Keep in mind during March 2012 the FOMC signaled a similar positive economic message, yields (Figure 1.3) jumped from 1.79& to 2.39% within 45 days. However, disappointing economic data reversed the jump in yields and proved the Fed’s economic projection incorrect.

Next week I would pay close attention to several economic reports here in the U.S. focusing on goods component of the economy. Last month's ISM (Figure 1.4) slip below 50 confirmed the Manufacturing weakness. The FOMC expects the weakness is transitory and due to one time negative contribution from Q2 sequester. Are they correct is it transitory? These reports may provide insight toward that answer and certainly will set the tone for the June ISM Manufacturing to be reported Monday July 1.

  • Monday June 24 Dallas Fed Manufacturing, last month -10.5. Consensus estimate for Monday is -1.8
  • Tuesday June 25 Durable Goods Orders. Focus on "Cap Goods Ship Non Defense/Ex-Air", last month -1.5%. Consensus estimate for Tuesday is +0.8%
  • Tuesday June 25 Richmond Fed Manufacturing, last month -2. Consensus estimate for Tuesday is 0

Figure 1.1 S&P 500 Index (SPX) Year to Date
Terranova 6-21-13 1
Source: Bloomberg

Figure 1.2 U.S. 10-Year Treasury 2010 to Present
Terranova 6-21-13 2
Source: Bloomberg

Figure 1.3 U.S. 10-Year Treasury 2012 to Present
Terranova 6-21-13 3
Source: Bloomberg

Figure 1.4 U.S. ISM Manufacturing 2007 to Present
Terranova 6-21-13 4
Source: Bloomberg

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