Market Commentary

The Federal Reserve restated its intention to keep interest rates
November 05, 2009

The Federal Reserve restated its intention to keep interest rates “exceptionally low” for an “an extended period of time” as long as inflation expectations are stable and unemployment fails to decline.   Economic activity is described as continuing to pick up as compared to last meeting’s assessment of “picking up;” consumer spending is described as “expanding” vs. “stabilizing” but conditions in housing, business investment and the financial markets are viewed as “unchanged.”

Equities initially rallied and treasuries sold off.  I believe treasury investors zeroed in on the assessment of an improving economy and outlook with the overnight rate remaining around zero percent.  Is or will the Federal Reserve fall behind the proverbial curve?

Equities on the other hand were relieved monetary stimulus will not be removed for the intermediate future.

As noted the other day I believe the Federal Reserve for good reason is hyper sensitive and will err on the side of too much monetary stimulus to avoid repeating the mistakes made during the Depression.  As history states during that era the Central Bank increased rates and drained reserves prematurely sending the economy back into the abyss.  As widely noted FRB Chairman Bernanke is a premier student of the Depression.

However a late day rally in treasuries pared losses by 50% following a sharp reversal in equity prices that left the Dow up only 30 points.  In my view end of the day trading was reminiscent to last fall.

The accepted reason for yesterday’s sharp reversal was the approval of a House bill to curb credit card rates that could negatively impact bank profits.  In my opinion this vote was widely expected given that it has been discussed on cable and network TV programs. 

Can I suggest there were other reasons such as great concerns the rebound will not be sustaining?  It appears the media is myopic in this view; a myopicy similar to the one that the subprime mortgage crisis is contained.

Yesterday’s data suggested more of the same.  A recovery occurring from depressed levels.  The ISM non manufacturing index posted a level over 50 for the second consecutive month, the first such occurrence since May 2008.  As widely noted services account for about 90% of the economy. 

Tomorrow the all inclusive employment data is released.  Consensus is estimating a 9.9% headline rate and a 175,000 decline in nonfarm payrolls.  In my view this data point could set the intermediate direction of all markets.  Will it validate or nullify my view the economy will continue to expand at a pace greater than expected?  We will know Friday at 8:30.

.Last night the foreign markets were down. London was down 0.44%, Paris down 0.29% and Frankfurt down 0.36%.  Japan was down 1.29% and Hang Sang down 0.63%.

The Dow should open flat. The 10-year  is up 3/32 to yield 3.51%.