Market Commentary

The two day FOMC meeting concludes today.
January 27, 2010

The two day FOMC meeting concludes today.  No change in monetary policy is assured but all will be scrutinizing the post meeting statement.  All will note whether or not the Committee believes overall economic activity is continuing to pick up, the labor market is continuing to stabilize, housing is continuing to improve, consumption is continuing to expand and whether or not business spending is continuing to cut back on fixed expenditures. 

Other notable topics will be the possible extension of mortgage backed buying; increased usage of reverse repos, and other activities to end today’s quantitative easing (QE) policy.

Tonight President Obama makes his first State of the Union speech in a political environment I believe is radically different than the one he faced as little as two weeks ago.  Most will agree the President is at particularly rocky point in his short presidency and his rhetoric has changed to a more populist tone.

Some pundits have called this change “The Brown Effect,” others “the race to the middle” while others “Clintonism.”  Whatever one calls it, the President’s agenda has been radically altered.

The White House has already “leaked” part of the platform stating its intent to rein in spending that does not contribute to jobs growth.  All will be listening for any possible continuation of the populist back lash against the country’s largest bankers.

I reiterate my long held view credit default swaps (CDS) and derivatives must be regulated but I also believe any angry political outbursts produce poor results.  What we need are policies that solve our problems, not statements that temporarily improve poll numbers.

As noted several times, I think the markets are facing a new period of uncertainty, this uncertainty however is the result of the happenings in Washington.

Turning briefly to yesterday’s market action, both treasuries and equities were relatively flat.  Earnings are generally exceeding expectations but Bernanke re confirmations concerns resurfaced and as noted above there is uncertainty about policy deliberations, both monetary and political.

Today the FOMC statement is made around 2:15.  New home sales are also announced at 10:00.  The number of new homes on the markets is expected to drop for a record 31 consecutive month to 235,000, the fewest number of homes since the 1971 inception of this data point.

Speaking of housing yesterday the narrowly focused 20 city S & P/Case Shiller Index was nominally higher than expected, the sixth consecutive increase.  Year over year prices have declined 5.3% versus a 7.3% drop Y/Y drop in October.  This is the smallest year over year decline in two years.  Incidentally this index is down about 29% from its October 2006 peak.

Last night the foreign markets were down. London was down 0.66%, Paris down 0.63% and Frankfurt down 0.22%.  Japan was down 0.71% and Hang Sang down 0.38%.

The Dow should open flat.  As written previously, the markets are facing some considerable headwinds; Washington, FOMC meeting, and a strong advance going into earning season which in my view has not disappointed.   The 10-year is off 2/32 to yield 3.63%.