Is the market correction over?
THE MARKETS:
Is the correction over? That is the question on most investors’ mind after the market has now advanced for the second straight week. After sinking slightly more than 8% in three weeks, the S&P 500 has now advanced 5% since bottoming two weeks ago. The rebound gained steam last week as inflation statistics remained benign and the Federal Reserve unexpectedly hiked the discount rate.
The market got off to a running start as a strong earnings report by Barclays Bank lifted markets worldwide. It was not only the earnings report that gave the markets a boost, but what Barclay’s president Bob Diamond said about the economy. He said the recovery is accelerating in the U.S. and around the world although Europe was still progressing slowly. “We see very strong signs of an accelerated recovery as we move further into 2010,” he said.
Meanwhile, across the pond there were continued discussions about the Greek crisis. A meeting of European Union (EU) finance ministers concluded with tough talk and a proposal that would include an advance of money to Greece from the EU in order to allow Greece time to let the austerity measures work. That proposal, however, assumes that Greece will actually take steps on their own to shrink their budget deficit, which seems like a tall order for Greek officials who have shown very little in the way of fiscal responsibility in the past. Greece announced last week that they are going to try and sell €5 billion ($6.8B) in 10-year bonds this week. If the sale is successful, the pressure on the EU and the euro would diminish, at least for the moment. If the sale fails though, the EU will have to devise a rescue plan very quickly as a failure would seriously pressure the euro.
Here in the U.S. inflation remains a non-issue currently with consumer prices edging up just 0.2% in January, while core prices which exclude food and energy costs fell 0.1%. It was the first decline in core consumer prices since 1982. Meanwhile, the Leading Economic Index (LEI) rose 0.3% in January, for the 10th consecutive gain, suggesting economic conditions should continue improving in the near-term.
The big event for the week was the Fed’s surprise 0.25% hike in the discount rate from 0.50% to 0.75% on Thursday. The Fed’s decision surprised the market, but it really should not have given Fed Chairman Bernanke’s comments the week before in which he said, “Before long, we expect to consider a modest increase in the spread between the discount rate and the target federal funds rate.” Regarding this increase, the Fed’s statement said, “The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy.” In addition, several Fed policymakers reiterated that position including Atlanta Federal Reserve President Lockhart who said “I would not interpret this action as a tightening of monetary policy or even a sign that a tightening is imminent. Rather, this action should be viewed as a normalization step.” In addition, New York Fed President Dudley said the Fed's pledge to keep benchmark rates low for an extended period of time “is still very much in place.” So while this is the Fed’s first step, it will likely be some time before they hike the fed funds rate with the unemployment rate still hovering near 10%.
Key things we’ll be watching this week:
Tuesday – Consumer Confidence
Wednesday – New Home Sales
Thursday – Initial Jobless Claims, Durable Goods Orders
Friday – GDP, Existing Home Sales
Data as of 02/19/10
HIGHLIGHTS:
The Mortgage Bankers Association announced the results of its quarterly delinquency survey on Friday, which contained a glimmer of hope: While the percentage of mortgages somewhere in the foreclosure process grew, the percentage of home loans delinquent -- but not in foreclosure -- actually shrunk on a seasonally adjusted basis in the fourth quarter, compared with the third quarter.
Some 152 million people have watched some part of the Vancouver Olympics over the first seven days of the games, NBC Sports said Friday, and the telecasts have had the most average viewers since the 1994 Winter Games.
The dollar touched an eight-month high against major currencies Friday, supported by the Federal Reserve's surprise move to increase its discount rate.
Rates for 30-year home loans edged lower for the second straight week, a report said Thursday, but remained above last year's record lows. The average rate on a 30-year fixed rate mortgage was 4.93% this week, down from 4.97% a week earlier, mortgage finance company Freddie Mac said.
States underfunded their pension plans and retiree health benefits by $1 trillion in 2008, a new report says. The report, released Thursday by the Pew Center on the States, says 21 states had less than 80% of the money they needed to pay for future retiree pensions. In 2006, that was true of 19 states.
