Tuesday, June 9, 2009

Market Reflections 6/8/2009

Talk of a Fed rate hike spread further Monday, making for continued selling in short-end Treasuries where the 2-year note rose another 13 basis points to end at 1.43 percent. Before Friday's better-than-expected jobs report, the note was yielding 90 basis points. Rising interest rates indicate that economic expectations are improving, and in this case quickly. Strength in Wednesday afternoon's Beige Book would further raise expectations as would strength -- and especially so -- in Thursday's retail sales report.

Though long Treasury yields are also rising, they're rising at a much slower pace than short rates, making for a flattening in the yield curve that reflects a movement out of safe-haven investments, in this case funds sidelined in the low yielding 2-year note, and an eventual movement toward higher returns, perhaps in the stock market. But the stock market hasn't benefited much yet, little changed on the S&P 500 at just under 940. Remember, stocks are up 40 percent from early March, a fact that is limiting buying spirits. Charles Schwab advised its clients on Monday to increase their exposure to the stock market, but suggested that they wait to buy on dips.

Big news in the session was a sovereign ratings downgrade for Ireland, news that pushed money into the dollar which rose nearly a cent against the euro to $1.3906. The strength in the dollar limited questions over inflation in the session, but inflation will be the inevitable concern should the economy actually begin to recover.

Talk of rate hikes, not the prospect of inflation, affected many commodities including silver, which aside from its value as a monetary substitute is also an industrial metal. Silver fell 2 percent from Friday to $14.95. Copper, zinc, lead and nickel also posted declines in the session.

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