Update 1:05 p.m.:

Update 11:05 a.m.:

The minutes of the April FOMC meeting have been released.  There is no market reaction to the headlines, but there were a couple of things worth noting.  First, the FOMC believes it will not sell assets (mortgage-backed bonds) until after the first tightening.  Many had expected the Fed to sell first and then tighten.  This is probably good news for mortgage spreads.  Second, the FOMC, while comfortable with expectations of economic growth, said that it is "unlikely consumers will be major factor for growth."  Huh?  Seventy-percent of the economy is consumer based, yet the FOMC expects economic growth without consumers' support?  Third, the FOMC did acknowledge the Greek problem could impact U.S. markets.  That's old news. 

Stocks continue to recover, and the Dow is now down only 40 points.  The euro is back in the spotlight a bit as the euro is back to 1.24.  But, the main factor is that technical traders believe that stocks put in an "important" bottom this morning when the S&P bounced off 1100.  The S&P is now 1118.  Technical indicators have been worthless for some time, but chartheads remain united.

Bond prices are down slighlty on the day.  The 2-year is .77%, the 5-year 2.12%, and the 10-year is lower by 3/32s to yield 3.36%.

Update 9:30 a.m.:

The first half of the trading day has seen a lot of volatility and most of it has been negative.  The Dow hit a low of -184 points, and there still is no easy explanation for that since the euro has been steady and higher.  The Dow has since recovered somewhat and is now down only 94 points.  Some traders believe today's close will be critical, but that's what they said Monday too. 

The bond market has cooled as stocks have rebounded off of the lows.  The 2-year is .74%, the 5-year 2.07%, and the 10-year is higher by 5/32s to yield 3.33%.

Yesterday I mentioned gold might be down on the "Cramer" top.  As you recall, Monday morning just after gold peaked Friday at $1,249, Jim Cramer said everyone should own gold.  Gold is down $25.00 today at $1,189, $60 below where Cramer said you must own gold.  Okay, that's the last time I pick on Cramer about this call.  Gold had been reacting mostly to the crisis.  This week, and especially after today's CPI report, it seems gold is responding to what might be a deflationary outlook. 
 
Update 7:55 a.m.:

While the euro has been very stable above 1.23 after the intervention rally, the Dow has been swinging wildly.  The low at the time of the comment below was -131, within 10 minutes the Dow was -60.  From there the Dow has been swinging rapidly between -60 and -110.  The Dow is now down 90 points.  I don't have any idea what is driving the volatility now, and I'll bet traders on Wall Street don't either. Maybe those computer programs are just shorting out. 

Bond prices are near unchanged.  The 2-year is .74%, the 5-year 2.09%, and the 10-year is unchanged at 3.35%. 
 
Update 7:15 a.m.:

The Dow opened down about 40 points but drove into positive territory (+11) as the euro popped over 1.23.  According to currency traders, the European Central Bank and the Swiss have been intervening in the market numerous times today on any sign of weakness in the euro.  Guess it's okay for Europe to manipulate currencies but not the Chinese.  But curiously, stock traders have temporarily stopped following the euro.  The euro remains above 1.23, but the Dow is now down 131 points.  Maybe traders have recognized that intervention is doomed to failure.  

Bond prices have turned higher on the day as stocks have fallen. The 2-year is .74%, the 5-year 2.07%, and the 10-year is higher by 5/32s to yield 3.34%. 

Earlier this morning the MBA weekly mortgage application numbers came out.  Refis surged, but there was a huge 27% plunge in purchase applications.  This follows on the heels of a big 9.5% tumble last week.  You had to know that the home tax expiration would cause a slowdown, but the numbers are pretty big.  We're heading into what should be the best season for home sales, but we might have used up a lot of demand. 

First quarter mortgage delinquency numbers are out and there is no improvement.  The number of mortgages 30-days or more past due rose to 10% of all mortgages outstanding.  The numbers also showed that the 90-day and longer part of the pipeline is bulging. 
   
Morning Comment:

The ban on naked short selling by Germany caused European stock indexes to fall by about 2-3% this morning, and the euro fell to 1.214 vs. the dollar.  At the time Dow futures were trading -75.  But of course the European central banks again intervened in the market and drove the euro back up to 1.225.  Dow futures rallied back to -35 on the euro rebound because our traders can’t figure out anything else to do but chase the every move in the euro.  As you know intervention won’t work over the long-term, but traders seem willing to trade huge blocks of stocks on the irrational currency movements.

The negative reaction to the German ban is somewhat surprising until you look at the history selective naked short sell bans.  Germany banned naked short-selling of stocks and bonds on about ten financial institutions and the bonds of sovereigns.  That should have at least been good for a short-term rally in those banks, but it doesn’t seem to be working.  The uncertainty of when and how rules can be changed has European traders up in arms.  They might also be thinking of what happened here when we did the same thing back in September 2008.  The SEC banned naked short selling on about 25 banks and brokerage firms.  There was a brief rally in stocks, but that was followed over the next six months by a 60% decline in the price of financials.  Maybe that’s what the Germans are thinking about as they sell stocks today.  In the short term, I think the markets will shove this aside pretty soon. 

For the rest of today the U.S. traders will continue to track every move in Europe, but we do have other news about the good ol’ U.S.A.  The Consumer Price Index fell by .1% in April, and the core rate (ex-food & energy) was unchanged.  These were both lower than expected.  Please note that the year-over-year core rate is down to .9%.  This is the smallest increase since January 1966.  While traders are wringing their hands over the euro, core CPI dropping below 1% is what keeps Ben Bernanke up at night. 

Later today we’ll get the minutes of the April FOMC meeting.  I doubt if there is anything of major interest in those.    

After an incredibly strong day yesterday, bond prices are off just a bit this morning.  The 2-year is .75%, the 5-year 2.09%, and the 10-year is down 3/32s to yield 3.36%.  Yesterday’s big rally in bonds was not a fluke.  Dealers reported very heavy volume all day long, and the buying was coming from very large accounts.  While the consensus on Wall Street and in the economic community is for inflation and rates to both rise, big bond investors must be in disagreement with that outlook.  Consider that if our inflation rate does stay below 1% over an extended period of time, the current 10-year note yield provides a 2.3% return over inflation.  Over time, that is a very good return over inflation.  The 10-year rate looks very low to us now because we all grew up in a higher rate environment.  But on a spread over inflation, the return is on the high side historically. 

I’ll be back with updates, but you know any updates will probably start and end with the euro. 

Dwight Johnston