This morning, the Bank of England (BOE) and European Central Bank (ECB) announced their policy decisions. Both central banks opted to keep their key lending rates unchanged. Is this a sign of what's to come when the FOMC meets in mid September, not an easing as so many hope?
As late as a couple of weeks ago, the ECB was widely expected to hike rates. Yesterday, however, the bank made an unprecedented announcement that it was "ready to contribute to orderly conditions in the euro money market" and that it would "act accordingly" to manage market volatility. Some had been questioning, given the flood of money that central banks had been injecting into the financial markets, whether rate hikes were likely any longer. With that statement, the ECB signaled strongly that it would not be hiking rates for now.
However, in his post-decision press conference, ECB President Jean-Claude Trichet was to reiterate a point that others have been making for the last several weeks. What central banks do through their temporary open market operations or one-day tender operations is distinct from their monetary policy. In other words, just because central banks are reacting to liquidity issues on a live or real-time basis with all those repos doesn't mean that they're necessarily going to revise their monetary policy plans and start easing benchmark rates. In fact, what they might be trying to do is bring the overnight rates, rising in many cases, back in line with their benchmark rates. For example, the BOE commented on overnight lending rates that had climbed "unusually high," requiring extra cash infusions by the central bank, but that central bank didn't ease rates, either.
The BOE also released an unusual statement, saying that the central bank didn't think it yet possible to determine how the disorder in the financial markets would impact companies and households seeking credit. That statement, especially since it was unusual for the central bank to add such comments, also added to the concern. Yesterday, the BOE had moved to allow commercial banks to increase their reserves and assured them of steps it would take if the overnight lending rate remained too high.
Keeping rates steady wasn't enough to please those who clamored for an easing, of course. The necessity behind the ECB's change in plans--the spreading of the subprime mortgage crisis through the globe's financial markets--pleases none who are ready for some stability. For those hoping for signs that central banks, especially ours, would toss out worries about inflation and instead lower rates, these central banks provided no comfort.
ECB President Trichet's press conference would be a focus of the pre-market session. The ECB head was to note that the volatility in the financial markets has led to uncertainty, the bank's monetary policy is still accommodative, and medium-term price stability is still subject to upside risks. On balance, these statements appear to leave open the possibility that the ECB will raise rates again. Later in the day, at least one U.S. Fed speaker was to echo that continuing concern about inflation risks.
So, what happened on the markets? Not much that helps us to determine what will happen next, as it turns out. In a repetition of the down-one-day-up-the-next kind of pattern that has prevailed lately, most indices merely retraced all or part of yesterday's decline. So, do we take one day's climb and assume that there will be follow through tomorrow, given the kind of pattern we've seen lately?
I don't think we assume anything except that we can't assume anything. Breadth, as measured by advancers versus decliners or up volume versus down volume, was bullish, but volume wasn't particularly strong. On the NYSE, new 52-week lows far outnumbered new 52-week highs.
Let's look at charts.
Annotated Daily Chart of the SPX:
For reasons of chart clarity, I haven't included lower indicators such as RSI, but it's not showing anything particularly meaningful anyway, in my opinion. It was at 56.37 at the close, squiggling up and down near the neutral 50 level. I could perhaps note that the bump higher this week was lower than the bump higher last week, although prices moved higher this week. That amounts to bearish divergence, but price could still be climbing and RSI could climb to a higher high (above last week's) yet, too.
My opinion? A move down through the channel is as likely as a move up through the channel, and I don't see anything that gives a strong preference to one move or the other.
Other charts show similar characteristics.
Annotated Daily Chart of the Dow:
Annotated Daily Chart of the Nasdaq:
Annotated Daily Chart of the SOX:
Some might point out a potential double-headed inverse (or reverse) head-and-shoulder formation on this chart. I see it, too. It's quite clearly formed, although it still lacks a right shoulder. The problem is that the SOX spent months and maybe the better part of a year confounding all expectations. It will adhere to certain long-term trendlines long enough to make you think they matter, setting up formations with trendlines along those, then break through, only to fail to meet targets. It will set up formations, all kinds of formation, and then they fall apart. All I can tell you about the SOX is that you shouldn't always believe your eyes. I'm not counseling you to stop watching, however. Just exercise caution about your conclusions.
Annotated Daily Chart of the RUT:
Annotated Daily Chart of the USD/Yen:
If the USD/yen should break to the upside, watch for potentially strong resistance at the 50 percent retracement of its recent decline. On a downside triangle breakdown, support near and just below 114.00 may be important.
While I want to urge caution when relying too strongly any longer on the USD/yen pair's predictions or confirmations of U.S. equity movements, observations this week have proven that this currency pair is still helpful to watch. We may be moving into a time when other forces assume more importance than what might be happening on the yen carry trade or with our multinational companies. We need to be aware that the predictive quality that's been observed for the last couple of years might not be as helpful in the future. Inter-market relationships change depending on what concerns assume primary importance. There was a time when diving ten-year yields would have elicited joy from U.S. equity traders, but lately that dive signaled flight-to-safety, not a source of joy to equity traders.
I can't include all the information and charts I'd like to include due to the number of economic releases that needed to be covered today, but it shouldn't go without mention that commodities had a strong day today. Gold and crude were among the commodities benefiting, although crude's big doji at the top of the climb was far from inspiring confidence in further gains today. What's going on? Various theories abounded: the threats in Nigeria and the flight to gold with global economic uncertainties figured among those reasons. However, the dollar has been sinking against the euro for the last three days and it's not particularly strong against the yen right now. At least part of the move in dollar-denominated commodities must be attributed to the fact that it takes more dollars to buy those commodities.
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Today proved to be another busy U.S. release day, made even busier because at least one typical Wednesday release, the crude inventories, was delayed until today.
The day started with retailers reporting August Chain Store Sales. Wal-Mart's report was considered better than expected. Some sources also noted that AEO, ANF, JCP, JWN, M, SKS and TGT beat expectations. Much attention has focused lately on whether the consumer was being hit by the subprime mess or rising food costs and would draw back on spending. Although some seasonal changes in the starts of school years may have increased back-to-school spending patterns for August, the news from retailers in the teen sector was generally good.
Two of the first releases today were related to jobs: the August Monster Employment report and the typical weekly initial and continuing jobless claims. Although we sometimes ignore these reports, particularly the weekly one, the emphasis has been on jobs ahead of tomorrow's important August Non-Farm Payrolls release.
The August Monster Employment Index for August reported a slight improvement of three points. This improvement was produced as most of the occupations listed and half of the industries revealed increased online job availability. However, this was the pretty picture and the headline while another figure--the annual growth pace--was the lowest level on record for Monster.
Retailers are cautious, Monster reports, while jobs in the mining industry ease and in the financial sector, show mixed results. Services such as education, healthcare and others expanded.
Initial jobless claims for the week ending September 1 were expected to drop to
320,000. They fell 19,000 to 318,000, the first drop in more than a month. Since
we've seen so many weeks of increases, the four-week moving average, a more
reliable indicator, was still rising, but only by 500 to 325,750.
The picture from these two reports was mixed as far as jobs creation was concerned, especially considering that initial claims were seeing their first drop in more than a month. As important as it might be to formulate some idea of what the jobs report might show tomorrow, we couldn't afford to ignore other important economic events or releases. Those included the second quarter's final Productivity and Costs, released at the same time as initial claims. Final productivity for the quarter was expected to rise 2.3-2.4 percent, with the previous estimate at 1.8 percent.
Productivity was instead revised higher to 2.6 percent, with the upward revision prompted by the upward revision to the second quarter's GDP a week ago. Higher production calms inflation fears, and those were further calmed by a lowering of increases in unit labor costs to a 1.4 percent annual rate. Previously those costs had been estimated to be 2.1 percent. The bad news came in comparisons over the last year, where unit labor costs rose 4.9 percent, the highest increase since late in 2000.
Among the other important reports of the day and the week was August's ISM Non-Manufacturing Index. The headline number was reported at an unchanged 55.8 percent, above the expected slight dip to 55.0 percent. Ten out of 18 industries grew while only five contracted. New orders climbed to 57.0 percent from the previous 52.8 percent, with new orders credited with the slightly better-than-expected result for this report.
The prices-paid component declined to 58.6 percent from its former 61.3 percent. This continues a trend of reducing inflationary pressures that has been seen in other reports.
Not all the news was great. Some purchasing managers who responded to the survey noted that tight credit was slowing business. Their comments were termed mixed.
The ISM non-manufacturing or services employment number dove below the benchmark 50, to 47.9 percent, as services industries reported a reduction in employment for the first time since the summer of 2004. While that reduces the contribution of wage pressures to inflationary pressures, it raises worries about the economy's health, too, as well as perhaps heightening concerns about what tomorrow's jobs number will reveal.
Crude and natural gas inventories followed at 10:30. Crude prices had jumped as news surfaced that Syria had fired on Israeli planes. Syria claimed those planes had violated its airspace. Israel had fired back. Also the U.S. embassy in Nigeria was reportedly warning of threats to U.S. interests.
When crude inventories were revealed, the crude supplies had fallen more than anticipated, by 3.9 million barrels. Gasoline supplies dropped 1.5 million barrels, and distillates climbed 2.3 million barrels. Refinery utilization rose to 92.1 percent. As Jim has commented recently, these numbers don't tell the whole story, particularly since brewing tropical storms and hurricanes may have disrupted shipping.
We also know that the Department of Energy and the American Petroleum Institute often report widely differing numbers for these supply figures. The API said that crude inventories dropped 4.8 million barrels, gasoline supplies rose 1.6 million barrel, and distillate inventories climbed 3.3 million barrels.
Natural gas rose 36.00 billion cubic feet. According to some estimates, this build was smaller than expected, but the inventory levels are still well above year-ago and five-year average levels.
Of special interest to those watching for any further implosions from the financial sector was the announcement by banking firm National City (NCC) that it was taking a $200 million pretax charge related to its mortgage operations. Firms began lowering NCC's ratings and earnings estimates before the investor conference that NCC set up.
Also in the financial sector, Citigroup (C) reassured investors that none of seven structured investment vehicles, SIVs, were suffering the problems seen by similar SIVs. Those problems in other SIVs, presumably held by other firms although I could not confirm this in the articles I found, had resulted in selling of assets at a loss. None of the seven SIVs had been downgraded, C asserted, and furthermore, the markets would have to deteriorate significantly before senior debt investors would see a loss in those vehicles.
The uncertainty about exposure to such losses and risks among the financials has contributed to the volatility in equity markets. At some point, investors will be inured to this kind of news, but while the uncertainty of the extent and ultimate impact remains, volatility should stick around, too. Adding to that uncertainty today was J.P. Morgan's lowering of profit forecasts for several European investment banks, including Deutsche Bank (DB) and UBS (UBS).
According to Federal Reserve data released today, there's no easing of the credit crunch yet. This report dealt with commercial paper. Commercial paper consists of short-term loans that corporations take out to pay for their operations. The outstanding volume of that paper fell 2.7 percent last week. Asset-backed paper, commercial paper that might be backed by mortgages and credit-card receivables along with other assets, fell even more steeply, 3.1 percent. For August, outstanding commercial paper dropped 11.9 percent, a record drop.
In an interesting aside to this report by the Federal Reserve, Dow Jones published an article today that alleged that private-equity firms and hedge funds are ready to step into the gap for companies that are unable to borrow from banks. These private-equity and hedge funds are taking up positions as direct lenders to these companies, the article noted. The excerpt I read didn't detail the rates those companies would be asked to pay, but I bet they weren't LIBOR or anything close to LIBOR.
Those who hope the mortgage industry has seen and faced the worst may have had their hopes dashed, too. The Mortgage Bankers Association also contributed data indicating that as late as June new foreclosures were hitting record highs. As many as 0.65 percent of mortgage holders began the foreclosure process in the quarter spanning April to June. Delinquency rates also rose, to 5.12 percent of all loans. Job losses in the Midwest and continued downturns in previously hot housing markets drove these figures higher, the MBA announced. With as many as 2 million ARMs scheduled to reset this year, these foreclosure and delinquency figures could soar in coming quarters.
A number of Fed speakers addressed these various concerns today. Atlanta Fed President Dennis Lockhart's take was that he's still concerned about inflation and would like to see it sustained at a lower rate. He terms Fed intervention in the mortgage problem a "moral hazard." He doesn't believe there's yet been a spillover of the housing woes into the economy. That last conclusion befuddles me, frankly, because that's not the information that we're getting from everything from the Monster Employment report today to Keene's anecdotal reports last night on the difficulty of obtaining loans at anything near the published LIBOR rates to yesterday's report by retailer Costco. Lockhart did say, however, that he was relying on anecdotal evidence, too, and seemed to be speaking directly to conditions in the South. He was gathering information from his business contacts in the South because he feels that much of the government data is backward looking.
All in all, this speech couldn't have reassured those hoping for an easing. In fact, some might have questioned the Fed's take on what was happening, wondering whether the Fed was again behind the curve. We don't want to believe that the Fed is behind the curve or that its efforts will be ineffective.
Fed Governor Randall Krozner also spoke today, though, and assured the country that the Fed was closely monitoring developments. He echoed Bernanke's words from last week, saying that if the mortgage woes worsened or persisted, they could impact the overall economy. He believes that the "strongly capitalized" U.S. commercial banks could help them weather this period of turbulence.
The Fed's Poole also weighed in, offering reassurances. Talking points included the Fed's willingness to help out with liquidity problems, stem forces that might lead to recession and maintain a focus on its long-term mission. Poole says that the U.S. economy is resilient, the commercial paper market was stabilizing--although today's numbers didn't show that--and he's confident that the global economy is strong. The global economy better be strong because Poole, like others, believes that the housing downturn is not yet finished.
I don't want to spend a lot of time on company-specific announcements today since so many economic events or releases needed to be detailed, so I might miss a report on your favorite trading stock. Tech giant Cisco (CSCO) reaffirmed financial targets this morning. John Chambers appeared on CNBC, seeking to quell concerns and buoy support for his company and other techs.
In other news, Merck (MRK) jumped on news that a New Jersey court denied various HMOs and insurance companies the right to combine their Vioxx-related suits against MRK into a class-action suit. This is a reversal of a previous lower court ruling allowing the class action suit. Even MRK's big jump did nothing more than bring it up to the top of its resistance zone over the last few weeks, though.
Apple (AAPL) was also in the news. The stock initially took a hit after the company lowered the price on its iPhone, enraging some who had bought the iPhone when it first debuted, but then bounced when the company said it would give every previous owner of an iPhone a $100 store credit.
Tomorrow's Economic and Earnings Releases
Tomorrow includes fewer economic events or releases, but one of those is the most anticipated of the week: August's Non-Farm Payrolls at 8:30. It seems that we have moved quickly from a time when we were worried about the jobs numbers being so tight that they were adding to inflation pressures to a time when we're waiting wide-eyed for these numbers, afraid that they'll show that the economy is screeching to a halt. Non-farm payrolls are expected to rise by 130,000 from the previous gain of 92,000.
At 10:00, July's Wholesale Trade will be released, followed by the ECRI Weekly Leading Index at 10:30.
What about Tomorrow?
If today did anything, it began to hammer home the realization that the Fed might not cut at its September meeting. As many on our website and on television and in print have noted, many market participants seemed to have priced in a rate cut. Some worried about what would happen after that September meeting, if there was no rate cut, and there remain many who believe that no rate cut will be seen. The actions of other central banks may have forced a lowering of those expectations for a rate cut, and that may be a good thing, allowing for a more gradual adjustment to the idea.
Many risks continue, however. The LIBOR, the benchmark lending rate established by the British Bankers Association, rose again. The U.S., along with many other countries, uses this rate as a benchmark. Keene reported last night on anecdotal evidence that the published LIBOR rate isn't available to many borrowers, more evidence of tightening credit to go along with that found in the commercial paper report today.
Daily charts just didn't provide a lot of clues today, and the recent volatility has proven to many that setups can't always be trusted anyway. Unfortunately, intraday charts provide even fewer clues as prices flattened ahead of tomorrow's jobs numbers.
Annotated 30-Minute Chart of the SPX:
Annotated 30-Minute Chart of the Nasdaq:
Annotated 30-Minute Chart of the RUT:
Annotated 30-Minute Chart of the USD/Yen:
On balance, what do we see from these intraday charts? Nothing much. Some give a slight edge to support; some, to resistance. One shows nothing at all about next direction.
If forced to answer a poll, I guess I'd come down on the "markets need to retest summer lows" side of the camp. I don't know that markets will do that, but I honestly don't see anything that leads me to believe we're in the midst of a V-bottomed recovery, either. The climb off the bottom has been choppy and I believe a great deal of uncertainty remains in the markets. So, that's how I'd answer a poll at this moment.
Does that mean that I believe that markets can't climb tomorrow? No, it doesn't mean that. On daily charts, many indices produced daily candles that sprang up from 10-sma and/or rising-channel-midline support. Prices looked as likely to climb up through those channels as to fall through them again. What it does mean, however, that I continue to be as cautious as I've been lately in both my own trades and in my suggestions to subscribers.
The Fed weighs risks of inflation against risks of a weakening economy. As traders or investors, we must weigh the risks of losing our trading capital against risks of not participating in gains. I think the risks for us should be weighted toward protecting trading capital right now. I've been wrong in the past--oh, how wrong I was in early 2003--and I will be again, but right now, I'm keeping my money tight in my own two fists.
I know how it feels to be a trader who comes to these pages each night or early
morning excited about finding a potential trade setup. I'd like to offer it, but
instead I offer my own cautions and a view of breakout or breakdown levels on
the daily charts.