Update 1:15 p.m.:
This was a very strange day. The Dow jumped roughly 200 points in the first half hour of trading. Normally when such a sudden move occurs you would see volatility the rest of the day with some selling followed by more buying etc. Instead, for the next six hours the Dow remained confined mostly to a very narrow range of +195 to +220 points. The Dow closed higher by 202 points. In the Morning Comment I offered the opinion that both the stock and bond markets had over-reacted on Thursday to Bernanke’s words. I think today the stock market over-reacted the other way, but I’m not really sure what the heck it reacted to in the first place. The European stock market move was the catalyst, but should we really care about a one-day move in markets across the Atlantic Ocean?
While the 2-year note stayed stuck at a very low .56%, yields did rise throughout the rest of the yield curve. The 5-year ended at 1.67%, the 10-year lost 14/32s to yield 2.93%, and the 30-year bond dropped a full point to yield 3.95%. Dealers said that volume was low today in the bond market.
There are no economic statistics tomorrow. Looks another day driven by what happens in Europe. Before we open in the morning, the European Central Banks will have issued the stress test results I mentioned in the Morning Comment. European stock indexes were all higher by 2-3% today, and that might have factored in the expected good news from the results. Hard to say for sure if the expected “positive” news will have any further positive impact or trigger profit-taking - following the old market adage "buy the sizzle, sell the steak." Either way, that’s the likely direction the markets here open tomorrow.
Finally, the unemployment benefits extension was at long-last passed. The President’s signature will come shortly. This has to be a huge relief for millions of families who saw their benefits stop and millions more who were facing an end in the near future. Although likely a very small number, some folks receiving benefits might have been doing so instead of taking a very low wage job. For that very small number, this long delay and near cessation of extended benefits entirely will serve as a wake-up call. For the vast majority of recipients, this is an absolute lifeline.
Update 9:40 a.m.:
After the Dow zoomed to +200 within the first 30 minutes or so of trading, the market has been very quiet and stable. The Dow peaked at +235 but there has been no sharp selloff. The Dow is currently up 200 points. The bulls are out in full force today on CNBC and on the business wires crowing about the great rally ahead. Where were these guys yesterday when the Dow was down over 100 points and 300 points lower than it is now? Now that would have been some good advice.
Bond prices have remained stable and lost surprisingly little ground given the big rally in stocks. The 2-year is .57%, the 5-year 1.68%, and the 10-year is down 12/32s to yield 2.92%. After a two point rally yesterday, the 30-year bond is down 17/32s to yield 3.92%.
Update 7:02 a.m.:
Existing Home Sales were expected to decline from a 5.6 million annualized pace to 5.1 million, but sales fell less than expected to 5.37 million. I warned yesterday that the number could be far from consensus since there was no way to know how when the houses would close. Remember these are based on closings and reflect the tail end of the home tax credit frenzy. This doesn't tell us anything about current activity.
As expected, stocks came roaring out of the gate, completely brushing away Ben Bernanke and those rising jobless claims. The Dow is now higher by 191 points.
The stock rally has finally caught up with the bond market, and prices are falling. The 2-year is .58%, the 5-year 1.70%, and the 10-year is down 1/2 point to yield 2.94%.
Morning Comment:
Dow futures are up sharply in pre-opening trading. Ben Bernanke’s comments yesterday that shook up stock traders have been relegated to the dust bin very quickly. There is no news in the U.S., economics or earnings-wise, that is causing this. It’s Europe. Stocks are rallying in Europe on some positive economic data, and that is causing U.S. traders to play follow-the-leader. When bulls can’t get the news they want here, they find it somewhere else.
In addition to the positive European data, Europe traders are excited about the release of the bank stress test results for European banks that the ECB will release tomorrow. You recall that we went through this same charade for U.S. banks a little over a year ago. Analysts already know most of the assumptions being used by ECB, and the opinion is the stress tests aren’t stressful. This means that all banks are likely to pass with flying colors. Although everyone seems to know this is a game, they seem willing to play along with the rules. Stock traders and the big investors in Europe and the U.S. don’t really care if the game is rigged as long as the rigging helps them win.
Weekly Jobless Claims have just been released and jumped from 427k to 464k. This is higher than the expected 425k and makes it apparent that last week’s decline was a fluke resulting the BLS seasonal adjustment. The 464k number keeps the job outlook in the slow-go mode. Later this morning Existing Home Sales will be released.
Ben Bernanke will be repeating his testimony before the House this morning. My take on what he said yesterday was that it was no big deal. He did not have anything new to say that we haven’t already heard from the Fed. The only interesting thing was his description of the economic outlook as “unusually uncertain.” This is an admission that the he and the Fed just don’t know which way the economy is going, but it’s not a prediction that the economy is headed south. I promise you, Greenspan never confessed to be "unusually uncertain." Sir Alan was usually wrong but never uncertain. Both the stock and bond markets over-reacted to his comments. Those reactions need to be reserved for critical economic news, not admissions of confusion. Bernanke’s Q&A will start about 7:00 a.m. PDT. I’ll report any significant headlines from that news.
Ahead of the Weekly Jobless Claims number Dow futures were higher by 100 points. The stock market has decided to ignore this piece of bad news and futures are still up 100 points ahead of the opening.
Bond prices are down but not much given the size of the rally yesterday. The 2-year is .57%, the 5-year 1.68%, and the 10-year is down 9/32s to yield 2.91%. The 30-year bond is down 10/32s to yield 3.91%. The 30-year bond rallied two full points yesterday.
I’ll be back with updates, but it looks like bullish traders will make yet another push to boost spirits after what has been a frustrating earnings season so far for the equity markets.
Dwight Johnston
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