Last Week’s Highlights:
Stocks: Dow 12K Falls
Bonds: Yields improve near 4.15%
Oil: $137 – Summit doesn’t help
Gas: $4.10
Dollar: Showing some weakness at 1.55
Leading Indicators: Small upswing in data
Economics This Week:
Date Item Est. Comment
6/24 Cons. Confidence 57 Looks unchanged from last read
6/25 New Home Sales 510K Small drop expected
6/26 GDP final Q1 1.0% Lift from early estimates
6/26 Existing Home Sls 5.0 mil Improvement Seen
Market Rates:
Yield
10-yr Treasury 4.17%
2-yr Treasury 2.88%
3-Mo Libor 2.80%
30-yr Mortgage Loan 6.27%
Tax Exempt Money Fund 1.34%
Taxable Money Fund 1.88%
10-yr AAA Municipal 4.13% (TEY @ 35% = 6.35%)
Dow Cracks
No doubt it was a rough week in the markets last week with the Dow breaking down below 12,000 to end the week at 11,842. The rebound in oil, heightened tension between Israel and Iran and continued concern in the financials is all it took to get the market bears out of their caves from a run lower. However, over the weekend a few glimmers of hope on the oil front have the prospects for at least a technical rebound looking good as we start this first full official week of summer.
The news over the weekend of course was the big oil summit in Saudi Arabia. King Abdulla indicated that his country would increase oil production output by nearly 10 million barrels a day and was willing to go further if necessary. Interestingly, he blamed speculation as the key reason for higher oil prices rather than a weak dollar. Post the King’s comments, oil has not retraced its steps and opens this week at just above $135 and retail regular gas in the US now stands at a national average of $4.10.
Inflation Marches On
With the floods in Iowa and much of the Mid-West over the last two weeks we are seeing the ethanol shift coming back to push inflation even higher. It’s now estimated that 2 million acres of corn were impacted by the floods last week. According to the AP wire, Iowa (the # 1 U.S. corn grower) floods inundated about 9 percent of corn crops, representing about 1.2 million acres -- almost 1.5 percent of the country's anticipated harvest. This sent nearly all agriculture futures through the roof, as if they needed an incentive with rising oil. Corn prices are now up over 80% in the last year and over 200% since mid-2006. The downstream impact of food inflation will clearly become more serious in the months ahead. And with the CPI already registering a hefty 4.1%, estimates of 5% are now commonplace and we haven’t even seen a hurricane yet!
Fed Time:
This week, the FOMC meets to decide monetary policy. So far, the futures markets suggest about a 90% probability for no change in rates and a steady fed funds target at 2%. This “no chance” of course, is a change in that easing policy has not most likely come to an end. In the Fed’s April statement and in Fed Governor talk since, the hot topic and caution word has been inflation. Now that GDP growth looks stable (1% expected this week in Q1 final), the Fed’s task at hand will be how to combat inflation. For the August FOMC meeting, the market is starting to price in a rate increase of 25 bps, but that probability now stands at just 20%. If inflation continues its upward course, look for the outcome probability to rise significantly.
Lighter Side:
Source: Internet
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