What’s hot: Retail, Philadelphia Fed Survey, Construction, Free Trade
What’s not: Technology, Casinos, Copper
After a rough first day of the month, the S&P 500 is now on pace for its third best October performance on record.
In terms of the economy, unlike recent weeks where the vast majority of economic reports came in better than expected, this week’s data was not as robust relative to expectations. Our economist, John Chapman examined Capacity Utilization and Industrial Production, click here for the full report. Two of the more notable reports this week were the NAHB Housing Market Index and the Housing starts report, which both came in significantly better than forecasts.The Philadelphia Fed Survey was quite impressive too. Analysts had expected a decline of -9.4 in the survey, but instead we got +8.7. New orders were also very strong. The most important point is that things even in October are showing signs of life, confirming that things have gotten better since the August-September doldrums. In other business news, President Obama signed into law three free trade agreements with South Korea, Colombia and Panama, making a total of 20 countries that have free trade with the United States.
Although commodities and stocks have been positively correlated for the last several years, in recent weeks equities have been decoupling from commodities. Since the recent lows, the S&P 500 has rallied by about 10%. While stocks have rallied, commodities like gold are revisiting their September lows. On September 26th, gold closed at $1,592.7. In the four weeks since that low, gold saw a modest rally of 5.5%, but it has since given up much of that rebound and is now within 1% of its closing low since its record high in August. The recent rally in equities has coincided with a sell-off in Treasuries, which is a complete reversal of the rally in bonds and sell off in stocks that we saw in August and September. In fact, US Treasuries and the S&P 500 have never been more inversely correlated with each other than they are now.
Given the fact that Europe has such deep problems right now, it’s hard to believe that the Euro is up relative to the dollar so far in 2011. While this outperformance is puzzling, on a longer term basis, the Euro has shown a pretty significant topping pattern relative to the dollar. One of the more encouraging aspects of this week’s trading was the movement in high yield credit spreads. Typically, high yield spreads move in the opposite direction as equities. So when the equity market sells off, high yield spreads widen and vice versa. This week, however, we saw high yield spreads tighten every day, even when the equity market was down.
The S&P 500 closed at 1238, which is considered a break out from the August-September range. I’m also looking at the Advance/Decline line, which measure breadth, for a confirmation. So far, earnings have been strong. 63% of companies have beaten EPS and slightly more have beaten on revenues. Next week, the following are key reports which will provide an first-hand look at the economy and consumers: Caterpillar (CAT), 3M (MMM), Amazon (AMZN), Visa (V), and UPS (UPS). Intel’s (INTC) strong earnings report is a big deal to those that follow or own shares of Intel stock. Intel has been trading in a sideways range for more than two years now, and it’s move today has finally pushed the stock above this range. This break out is a very bullish sign for the stock.
One of the biggest business news stories of the week was the earnings report from Apple. The earnings per share number was a disappointment. It’s been seven years since Apple has missed estimates. The delayed refresh of the iPhone until October resulted in consumers delaying their purchases. The good news is that sales of the new iPhone 4S have exceeded 4 million units in the first week end of sales. This implies a very strong fourth quarter and Apple raised estimates for next quarter. Sales of both Mac systems and iPads were at their highest levels ever.
Key Rates from Bloomberg.com
| CURRENT | 1 MO PRIOR | 3 MO PRIOR | 6 MO PRIOR | 1 YR PRIOR | |
|---|---|---|---|---|---|
| Fed Funds Rate | 0.08 | 0.10 | 0.02 | 0.11 | 0.07 |
| Fed Reserve Target Rate | 0.25 | 0.25 | 0.25 | 0.25 | 0.25 |
| Prime Rate | 3.25 | 3.25 | 3.25 | 3.25 | 3.25 |
| US Unemployment Rate | 9.10 | 9.10 | 9.20 | 8.80 | 9.60 |
| 1-Month Libor | 0.24 | 0.23 | 0.19 | 0.21 | 0.26 |
| 3-Month Libor | 0.42 | 0.36 | 0.25 | 0.27 | 0.29 |
Mortgage* (National Average)
| CURRENT | 1 MO PRIOR | 3 MO PRIOR | 6 MO PRIOR | 1 YR PRIOR | |
|---|---|---|---|---|---|
| 30-Year Fixed | 4.18 | 4.13 | 4.49 | 4.78 | 4.24 |
| 15-Year Fixed | 3.47 | 3.32 | 3.62 | 3.99 | 3.63 |
| 5/1-Year ARM | 3.03 | 2.93 | 3.01 | 3.31 | 3.17 |
| 1-Year ARM | 2.95 | 2.97 | 3.17 | 3.12 | 3.12 |
| 30-Year Fixed Jumbo | 4.81 | 4.75 | 4.96 | 5.39 | 5.25 |
| 15-Year Fixed Jumbo | 4.15 | 4.04 | 4.29 | 4.67 | 4.60 |
| 5/1-Year ARM Jumbo | 3.17 | 3.17 | 3.32 | 3.75 | 3.85 |
Economic Calendar from Econoday.com
![[djStar]](http://bloomberg.econoday.com/images/bloomberg-us/djstar.gif)
![[Star]](http://bloomberg.econoday.com/images/bloomberg-us/star.gif)
