Stocks continue to inch higher as the trading session progresses on what looks to be a market anticipating a 25-basis point rate cut at next Wednesday's FOMC meeting.
The 30-day Fed Funds futures (ff02z) are settling near the 98.56 level, which now has many calling for a 50-basis point cut, which would have the current Fed funds rate of 1.75% fall to 1.5%. Fed funds futures rose sharply yesterday after consumer confidence fell 14.3 points to 79.4, which has consumer confidence falling below year ago levels and below the recession/terrorist attack levels.
This has analysts, both fundamental and technical confused about what a 25-basis point cut would mean for the markets. A cut of that magnitude would have the Fed admitting that the economy is quite weak and in need of further stimulus. A continued easing policy by the Fed is helped in part by low inflation and high productivity. While an aggressive rate cut would be to help try an spur spending at the industrial level on lower borrowing costs, many wonder if further rate cuts will do much more than rate cuts implemented from over a year ago.
Technology stocks are getting a boost today under notion of an aggressive Fed ease as the Networking Index (NDX.X) 117 +10% which has fallen 201 points or 63% this year to date, as corporate IT spending has all but dried up. Not because the Fed hasn't been kind, but that end demand from consumers has been tapering off for many of the products corporate America has to sell and need for new communications infrastructure had been overwhelmed with supply.
The Fed has admitted in past meeting notes that it has been the consumer that has been entirely responsible for the economy coming out of a recession in recent months, but the recent slump in consumer confidence, which many tie to the stock market's performance has renewed concerns that a double-dip recession is just around the corner.
The S&P Retail Index (RLX.X) 76.30 -2.05% lags today's broader market bullishness, undoubtedly mimicking yesterday's consumer confidence numbers. Discount giant Wal-Mart (NYSE:WMT) $54.25 -3.9% continues to trade lower after Goldman Sachs downgraded the stock based on the company's out-performance of the broader to date, with the thinking that future upside becomes limited.
I'm at least happy that Goldman Sachs didn't tell investors to now turn and invest in companies that can't earn a dime, that have under performed the broader S&P 500 Index (SPX.X) over the past two years.
The Morgan Stanley Cyclical Index (CYC.X) 431.50 +0.63% certainly isn't benefiting to the degree that broader technology is today. I would have thought this group would be the GREATEST benefactor of a Fed easing as the bulk of these companies are the ones that spend greatest on new technologies once earnings hit the bottom line. Unfortunately, the deeper cyclicals benefit from growing consumer confidence and spending habits that follow.
As the session progresses, early morning bearishness in Treasuries is beginning to fade as the 5, 10 and 30-year futures contracts now trade with marginal losses. In last night's Index Trade Wrap at OptionInvestor.com, it was our thought that bulls needed to see some type of meaningful selling in the longer-dated maturity of the 30-year (us02z) 110'130 -0.14%, but I'm not seeing it today. It would well be that today's "lack of selling" in Treasuries comes in from of Wednesday's FOMC meeting and potential rate cut. What will be most important to monitor is the bond markets reaction to Wednesday's FOMC meeting. If the Treasury bond market would sell off under a rate cut, then I think good things for equities can take place.
As I type.... the 10-year December futures (ty02z) 114'135 +0.02% and shorter-dated 5-year December futures (fv02z) 113'155 +0.01% have just edged into positive territory in the last minute and may have stocks vulnerable near-term, just off their highs of last week.
With consumer confidence lacking, mutual fund inflows have been rather anemic if not declining. Treasuries still serve as the large piggy bank and I'm very skeptical of today's rally in equities. While there are still a lot of short looking for some cover, I personally don't think "new bulls" are doing much of today's buying in stocks.