The market was higher out of the gate as futures bound higher on the better than expected Intel news. Intel’s earnings have given investors hope that the trough in earnings is in. Economic reports were relatively heavy today. CPI was in-line with expectations and offered no real surprises. The Empire State Manufacturing Index came in roughly flat versus expectations of -4.5. This is a positive sign for the broad economy and could be a sign that the manufacturing sector is normalizing. Industrial production and capacity utilization figures also came in better than expected and showed signs of stability.
The FOMC Minutes were fairly optimistic, but take these reports with a grain of salt. The Fed has been wrong with their forecasts at almost every turn since the beginning of this crisis:
In the forecast prepared for the June meeting, the staff revised upward its outlook for economic activity during the remainder of 2009 and for 2010. Consumer spending appeared to have stabilized since the start of the year, sales and starts of new homes were flattening out, and the recent declines in capital spending did not look as severe as those that had occurred around the turn of the year. Recent declines in payroll employment and industrial production, while still sizable, were smaller than those registered earlier in 2009. Household wealth was higher, corporate bond rates had fallen, the value of the dollar was lower, the outlook for foreign activity was better, and financial stress appeared to have eased somewhat more than had been anticipated in the staff forecast prepared for the prior FOMC meeting. The projected boost to aggregate demand from these factors more than offset the negative effects of higher oil prices and mortgage rates. The staff projected that real GDP would decline at a substantially slower rate in the second quarter than it had in the first quarter and then increase in the second half of 2009, though less rapidly than potential output. The staff also revised up its projection for the increase in real GDP in 2010, to a pace above the growth rate of potential GDP. As a consequence, the staff projected that the unemployment rate would rise further in 2009 but would edge down in 2010. Meanwhile, the staff forecast for inflation was marked up. Recent readings on core consumer prices had come in a bit higher than expected; in addition, the rise in energy prices, less-favorable import prices, and the absence of any downward movement in inflation expectations led the staff to raise its medium-term inflation outlook. Nonetheless, the low level of resource utilization was projected to result in an appreciable deceleration in core consumer prices through 2010.
Looking ahead to 2011 and 2012, the staff anticipated that financial markets and institutions would continue to recuperate, monetary policy would remain stimulative, fiscal stimulus would be fading, and inflation expectations would be relatively well anchored. Under such conditions, the staff projected that real GDP would expand at a rate well above that of its potential, that the unemployment rate would decline significantly, and that overall and core personal consumption expenditures inflation would stay low.
Assets were higher across the board today. Stocks finished 3% higher, oil closed almost 4% higher, copper closed 4% higher, banks closed 4% higher, transports were 2% higher, and gold closed 1.5% higher.
All in all it was not a convincing rally. It was built on the back of fairly strong fundamental news, but the internals showed little conviction. Volume was very light, breadth was not great and the transports failed to confirm the move in the industrials mostly due to poor earnings from JB Hunt. The truckers were negative across the board on the day in what can only be seen as a huge negative for anyone expecting a sharp recovery in economic activity. This rally smells like a short covering rally to me. Investors will want to see more evidence of a rebound before they pile into stocks for the long-term.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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