The FOMC rate decision passed as expected with the policy group bringing the most aggressive interest rate easing cycle in decades to an end by leaving the benchmark rate unchanged at 2.00 percent. Adding a hawkish tinge to the event, the Fed further raised its concern about inflation pressures. However, market participants were still clearly disappointed by the outcome as expectations for a quarter point hike by September dropped from nearly 90 percent to 65 percent according to futures. Downgrades to the outlook for economic growth and the health of the financial markets no doubt contributed to the dampened speculation.
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CREDIT MARKET: HOW IS IT DOING?
A DEEPER LOOK INTO THE CHANGES THIS WEEK:
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Volatility in the credit markets has jumped considerably over the past few weeks. For default swaps rates, this volatility comes with an 8.6 percent jump in premiums as investors brace for the next round of write downs. Further contributing to the jump in risk was a warning from Moody’s that defaults over the coming year could jump five fold. Equally concerning was a report from Wachovia that said CDO defaults since October have totaled 200. Nominally, that equates to an estimated $220 billion, which is 36 percent of CDOs with US ABS exposure.
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FINANCIAL MARKETS: HOW ARE THEY DOING?
A DEEPER LOOK INTO THE CHANGES THIS WEEK:
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Equity markets have clearly faltered over the past week. The Dow Jones Industrial Average dropped below 11,500 to push lows that have not been since August of 2006. Leading this decline were the struggling financial and auto sectors, which have been downgraded by analysts and are on the verge of receiving similar sentiments from credit agencies. The banking group fell more than 6.9 percent on the week, while many of the consumer-related sectors tallied losses nearer to 3 percent.
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Confirming that the bearish turn in equity markets is finding genuine selling pressure - and not merely experiencing dips for bargain buying - the S&P Volatility Index rose another 1.2 percentage points. At 22.4 percent, the fear gauge is at its highest level since April. Also, as would be expected, market breadth is showing that declining shares are far outstripping those on an uptick. What’s more, with major support giving way, investors exercised a slew of puts to cap losses on the quarter.
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U.S. CONSUMER: HOW ARE THEY DOING?|
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While the most recent round of government indicators have crossed the wires with unexpectedly strong results, the more timely, leading gauges are still reflecting a struggling economy. Ahead of the early released payrolls report, continuing jobless claims rose to their highest levels since February of 2004, suggesting managers aren’t simply throttling back on their hiring practices, but they were also making cuts. For the housing market, mortgage applications dropped another 9.3 percent, bringing demand to six year lows. With rates near their highest levels in a year, and sentiment at quarter century lows, major purchases are likely to be put on hold.
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Recently released economic data crossed the wires unexpectedly strong. However, like the Fed’s commentary, these numbers came with hitches. The biggest jump in personal income through May in two-and-half years was largely the result of the temporary tax rebates; and this strong jump wouldn’t even translate into an equivalent rise in spending. Elsewhere, existing home sales improved 2 percent through the same period, but new home sales fell back to its near 17-year low. The first expansion in the manufacturing sector, boosted spirits until market participants noticed that the prices gauge was at a 29-year high and employment and orders numbers were still down.
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