The index of pending home sales increased 1.5% after a revised 1% decline the prior month that was larger than initially reported, figures from the National Association of Realtors showed today. This week presents a very busy week for data releases. We have not only the FOMC meeting and policy announcement, but we also have the ECB’s policy announcement, along with the awaited non-farm payrolls release this Friday morning. It looks as though all markets are anticipating QE around the world to continue to boost commodity and equity prices. But that begs the question, will inflation increase along with these other rallies? If so, the bond market is in a conundrum. Go higher because the central banks are buying, or will the bond market start to head lower to price in future inflation?
Equities: The JUN13 E-mini S&P 500 are looking strong once again today, trading up 9.5 points to 1586. This is only 7 points away from the 2013 high of 1593. We believe the Fed will recognize that the official inflation numbers are still highly contained, and thus stoke more risk-on sentiment in the markets with a continued readiness to unleash stimulus upon the markets. The JUN13 E-mini Nasdaq has actually broke through its 2013 high, and is today up 1.05% to 2860. We have a technical target is 2930, and would not be surprised to see the technology companies be the new leaders of the market and propel the Nasdaq higher.
Bonds: The U.S. 30-year bond is up slightly today, trading up 1 tick to 148 29. The bond market is in a very interesting place right now. It seems as though the key stimulus programs around the world, such as USA, Europe and Japan, are actually working to boost stock prices, incite a real estate recovery, and also boost commodity prices. However, with all this happening, why are the inflation numbers increasing? One would assume they would if these other markets are increasing. Perhaps we will start to see increased inflation numbers later this year as this stimulus-created wealth gets worked into the system. If this is the case, we must watch the bond market very closely to see what it is saying about future inflation. We believe the only reason the bond market is still at these elevated levels is because of the Fed’s stimulus policies. If the bond market starts to think that the higher stock prices, housing recovery, and higher commodity prices will cause inflation, we believe at some point the bond prices will head sharply lower. It could end up being 12 months from now…
Commodities: Crude oil continues its sharp rally off of the $86 low in mid-April. Today, crude is trading up 1.2% to $94.12. We believe this market is over-extended to the upside and would not be surprised to see a small correction down. Natural gas has had a very strong rally after selling off to $4.15. Today this market is up 3.34% to $4.36. We believe this market is in a very strong uptrend and would not be surprised to see natural gas move up beyond $4.45. Gold continues its rebound today, trading up $18 to $1,471. We believe gold’s rally will be capped below $1,500, and may start to consolidate between $1,450 and $1,500.
Currencies: Many major FX instruments are up against the US dollar today, with the Euro up 75 ticks, the Aussie dollar up 74 ticks, and the Pound up smaller at 18 ticks. We believe the FOMC announcement on Wednesday will impact the FX markets in a big way. It looks as though markets are anticipating a Fed that pledges more stimulus and remarks that inflation is contained, and more stimulus will provide more benefits than risks.
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