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ECONOMIC REPORTS AND WHITE HOUSE SAY ECONOMY WILL SLOW
Investors
are jamming the exit doors for the U.S. dollar this morning as three
economic reports came out with a negative bias, with the only positive
report coming from the Energy Department. Stock prices are struggling to
move higher from yesterday’s close and bond prices are catching a
modest bid to push yields lower with the economic slowdown moving into
the spotlight. Most investors, including myself, expected lower
volatility today going into the holiday weekend, but this development in
the foreign exchange market is quite significant. The dollar is really
getting whacked! Yesterday the U.S. dollar index closed at 85.12, but
this morning it gapped-down to open at 84.77 and is still getting
pounded lower to 84.32, touching a six-month low versus the euro.
The
first surprise that seemed to have the biggest impact on the dollar was
the increase in unemployment claims from 309,000 to 321,000. Analysts’
consensuses were looking for a number closer to 310,000. To add fuel to
the fire, Alcoa announced they would be sending another 13,000 workers
to the unemployment lines with a reduction of workforce. The
unemployment numbers hit the dollar, but stock futures were not affected
much.
Thirty
minutes before the bell rang on the floor of the NYSE the University of
Michigan released their index of consumer sentiment. Last month the
index had a reading of 93.6 and analysts were expecting 93.3 for
November, but the number came in lower than expected at 92.1. The
slumping consumer confidence numbers aided the dollar decline, but this
time around stock futures also moved lower.
The
third report adding fuel to the dollar decline came from the Mortgage
Bankers Association saying their application index was 3.7% lower last
week even though the 30-year fixed rate dropped to 6.13%. This is the
lowest rate since January and below the rate from a year ago at 6.26%,
but mortgage applications are declining nonetheless.
The
only report that would have offered some support for the dollar came
from the Energy Department with an unexpected build in crude oil and
unleaded gasoline inventories. Analysts expected a build of
approximately 500,000 barrels in crude, but the number came in much
higher than expected at 5.1 million barrels. Prior to the report, some
analysts were expecting energy prices to rise as traders cover their
short positions to square-up prior to the long weekend. Just the
opposite is actually occurring. As I write, crude is down $1.42 to
$58.75. I expect these low prices to last for another month, and then we
move higher into the first quarter around the $60 to $65 a barrel range,
but no blow-out back to $80 until later next year.
I
attributed dollar weakness to the reports released this morning, but the
decline actually began overseas yesterday following the revelations from
the Council of Economic Advisers. Here it is from CNNMoney.com:
White
House cuts economic growth forecast
Council of Economic Advisers says GDP to slow for remainder of year and
in 2007, blaming weakness on housing.
November
21 2006: 3:03 PM EST
NEW
YORK (CNNMoney.com) -- The U.S. economy should experience slower growth
than originally anticipated for the remainder of the year and in 2007,
the White House said Tuesday.
The
President's Council of Economic Advisers projected that economic growth
would be slower than forecasted last June, with real gross domestic
product growing 3.1 percent for all of 2006, down from June projections
of 3.6 percent pace.
In
2007, the White House expects the economy to expand at a pace of 2.9
percent, lower than earlier predictions of 3.3 percent.
Further
into the report the Council also said they expect consumer inflation to
moderate around 2.3% next year versus the prior forecast of 3.0%. They
also expect the economy will add fewer jobs next year. In June the
forecast job growth was 156,000 per month and now they have revised
employment growth to average 129,000 per month.
Increasing
Odds of a Rate Cut
As
economic reports come in weaker than expected, currency traders are
suggesting the weakness could prompt the Federal Reserve to cut interest
rates in the first quarter. From a Bloomberg article today:
"Investors
see a 39 percent chance the Fed will lower its target overnight lending
rate between banks at its March 21 meeting, compared with 17 percent
odds on Nov. 15, according to interest-rate futures."
Also
from the same article:
"We
are bearish on the U.S. economy and expect slower growth, strengthening
the case for the Fed to cut rates in March," said Niels From, a
currency strategist in Frankfurt at Dresdner Kleinwort. "We could
see the dollar suffer further."
On
to the Stock Market
This
section won’t take long for me to write, as I prefer the simplified
version wherein you decide for yourself what will happen. First, have a
look at the one-year chart of the S&P500. The relative strength
index says the market is overbought and in need of a correction. Price
and momentum are diverging since the peak on 10/26…price is moving
higher, but momentum is moving lower with non-confirmation of the higher
prices.
From
a technical perspective stocks are due for a rest, and from a
fundamental perspective please compare the chart with what government
officials and market analysts are telling us about the economy. I’m a
very unpopular writer when I’m bearish on the overall stock market, so
let’s suffice it to say that some sectors will do quite well and
others will suffer terribly. Pick your poison: Technology, Healthcare,
Energy, Precious Metals, Home Builders, Financials, Retailers, you name
it.
I
still believe the mining sector is the best place to invest money based
on dollar weakness and mining infrastructure that has not kept pace with
the growing global demand for metals. Also note that energy prices have
declined more than the prices of the metals. This will improve the
bottom line profits for mining companies since they require a great deal
of energy to harvest the metals. The time will come for energy stocks as
well; I just think it’s a bit early and we will get a chance to buy
them at more attractive prices a few weeks down the road.
Decision
Time for Bonds
In
my Wrap-Up last Friday I said: “To sum it up for the three days, the
bond market is telling the rest of the world that bond prices can rally
(lower yields/interest rates) because we have very little threat in the
way of inflation expectations, but bonds won’t break-out to near-term
highs until we see more proof of an economic slowdown. The lower than
expected inflation caused stocks to rally because it was perceived the
Fed would stay out of the way, and possibly have room to move rates
lower next year.
Fed
Fund futures suggest there is a growing possibility the Fed will cut
rates next year, but it still remains a possibility more than a
probability. For the Fed to cut on the short end of the curve, the long
end will also need to move lower. The 30-year bond price has been on the
verge of breaking-out higher to usher-in lower long-term rates, but more
economic weakness without inflation will need to be seen. The following
chart says it all:
From
the chart you can see the bond price has made a run five times at
breaking the high going back to February of this year. Bonds will need
the catalyst of weakening economic conditions to rally further, and we
could very likely get that very catalyst next week. We won’t get much
more in the way of new economic data on Friday or Monday, but I count at
least a dozen high-profile economic reports due out beginning Tuesday
next week:
Monday
11/27: Options Expiration for Dec.
Gold and Silver Contracts (not an economic report, just a head’s-up
for PM traders)
Tuesday
11/28: Durable Goods, Consumer
Confidence, Existing Home Sales
Wednesday
11/29: DP Report, Mortgage
Applications, New Home Sales, Fed’s Beige Book
Thursday
11/30: Producer Price Index,
Jobless Claims, Chicago Purchasing Mgrs. Index
Friday
12/1: Construction Spending, ISM
Manufacturing Index, Vehicle Sales
The
Fed has openly stated they are “data dependent” moving forward. The
economic reports due out next week should help to clarify the outlook of
the countervailing forces of inflation versus slowing growth. Does the
Fed really have room to cut rates as the dollar declines against all
major currencies? If foreign central banks find it necessary to raise
interest rates to fight inflation, the Fed will be in a bigger pickle to
cut interest rates. Also, before the Fed has room to cut rates, I
believe our policy makers will have to address the problem of the
currency peg with China. If the currency peg is not addressed, our new
Congress just might have to resurrect the 27% import tariff Congress
wanted to impose a year and a half ago. The plot continues to thicken in
the foreign exchange markets!
Checking
Back on the Markets
The
broad stock averages are just barely poking their heads into positive
territory with the NASDAQ leading the way higher by ten points to 2,465,
with the broader S&P 500 three points higher at 1,406. The NASDAQ
got some help by a better than expected report from Dell, but the Dow is
being held back by troubled GM shares as Kirk Kerkorian decided to
lighten-up his GM position by 14 million shares.
The
bond market closed early today with marginally higher prices, lower
yields. Two-year notes yield 4.75%, ten-year notes yield 4.57% and
30-year bonds yield 4.65%. Bond yields are inverted on the short-end and
flat on the long-end. The yield curve implies we have a recession
coming.
The
U.S. dollar index came off it’s lows to close at 84.54, but still a
major drubbing for the day. One would expect gold and silver to perform
well in the face of a significant dollar decline, but I believe we are
seeing some short-term trading games prior to December options expiry on
Monday. We’ll just have to see how things unfold next week.
As
I said, we don’t get much new information until Tuesday. In the
meantime I hope all of you out there have a Very Happy Thanksgiving Day
and weekend! It’s time to count our blessings! May you be blessed with
a restful weekend and wisdom in your investment decisions!
Have
a Great Evening!
Mike
Hartman
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Copyright ©
2006
All rights reserved.
Michael
Hartman
Technical Analyst & Market Commentator
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