(CEP News)
• S&P 500 Up 1.2%
• Canadian Dollar Flat
• Treasury Yields Fall 5 bps at Long End

Stocks Pare Gains After Fed Warns of Rising Unemployment, Slow Growth

U.S. stock markets trimmed their gains after FOMC members cast a growing shadow over prospects for a rebound in economic growth in the minutes of their most recent meeting, but speculation about bailouts led to a strong rally at the close.

The S&P 500 closed up 10 points, or 1.2%, to 825, as it rallied nearly 10 points in the final 40 minutes of trading. The Dow Jones industrial average climbed 48 points, or 0.6%, to 7837 and the Nasdaq was up 29 points, or 1.9%, to 1591. In Canada, the TSX gained 109 points to 8934.

Market participants focused on downgrades to economic growth projections in the minutes from the March 17-18 meeting. Fed members lowered forecasts for GDP in the second half of 2009 and into 2010, and said they expect GDP “to flatten out gradually over the second half of this year and then to expand slowly next year as the stresses in financial markets ease.”

The employment forecast was especially worrisome. The FOMC members said they see the “unemployment rate rising more steeply into early next year before flattening out at a high level over the rest of the year.”

The forecasts for inflation were also downwardly revised and members said inflation could fall “below desirable levels” in the months ahead.

Despite the comments, a report suggesting life insurance firms will be eligible for TARP bailout funds led to a rise in stock prices. A Wall Street Journal source suggested the U.S. Treasury Department will announce the expansion of the TARP “within the next several days.”

Optimism was also boosted by a merger of two large U.S. home builders. Pulte Homes launched a takeover of rival Centex Corp. in an all-stock deal worth $1.3 billion. The combined company will be the largest U.S. home builder by market capitalization.

The only notable U.S. economic data release was wholesale inventories, which fell 1.5% compared to expectations for a 0.7% decline. It was the sixth consecutive decline and the largest fall on record.

Euro zone data continues to show a slumping economy. German authorities reported that German factory orders fell 3.5% month-over-month in February, worse than the 2.1% drop expected and adding to January’s 6.7% contraction.

Meanwhile, Germany’s trade surplus rose to €8.7 billion in February from the previous month’s downwardly revised €7.0 billion level. Economists had expected a smaller gain to €7.5 billion.

In Europe, the Stoxx 50 closed up 4 points to 1877, the UK FTSE 100 down 5 points to 3926 and the German DAX up 35 points to 4358.

Long-Dated Treasury Yields Fall After FOMC Minutes

Long-dated Treasury yields declined on Wednesday as market participants detected a bias for more quantitative easing in the minutes of the most recent U.S. Federal Open Market Committee meeting.

Most recently, U.S. two-year yields were up 0.8 bps to 0.91%, with five-year yields down 2.6 bps to 1.82%, 10-year yields down 5.0 bps to 2.85% and 30-year yields down 5.5 bps to 3.66%.

The minutes showed there was some disagreement amongst members over what assets to buy and how much to spend, but a consensus to do whatever is necessary.

According to Eric Lascelles, rates strategist at TD Securities, the Fed is clearly saying, “Let’s just throw everything against a wall and see what sticks.”

In the minutes, the Fed placed an emphasis on the TALF program to buy newly-issued securities that back consumer loans. The participation in that program has been disappointing, however, and the Fed’s willingness to act will likely mean more Treasury purchases, according to George Goncalves, chief Treasury, Agency and TIPS strategist at Morgan Stanley.

“We would imagine that the Fed would probably upsize the U.S. Treasury program sometime in the near future if credit easing programs don’t get enough traction or if liquidity programs start to decline because of less short-term credit needs,” he wrote in a client note.

He said the program will be increased from its current $300 billion level before the end of the second quarter.

Elsewhere, yields on two-year Canadian government notes were down 2.7 bps to 1.10%, with five-year yields down 5.0 bps to 1.83%, 10-year yields down 5.4 bps to 2.90% and 30-year yields down 4.5 bps to 3.63%. The September 09 BAX contract was up 3.0 ticks to 99.50.

In Germany, returns on two-year German notes were down 3.0 bps to 1.43%, with five-year yields down 0.9 bps to 2.43%, 10-year yields flat at 3.21% and 30-year yields down 1.5 bps to 4.06%.

Yields on UK two-year notes were down 7.2 bps to 1.39%, with five-year yields down 9.6 bps to 2.52%, 10-year yields down 9.0 bps to 3.35% and 30-year yields down 1.6 bps to 4.33%.

Canadian Dollar Moves Higher After Strong Housing Data

A pickup in Canadian housing starts helped to support the Canadian dollar on Wednesday.

The Canadian dollar has been the top performer against the greenback in the last five sessions and is holding those gains, at 1.2375 - a flat reading on the session. USD/CAD has lost more than 2% in the last five trading sessions.

USD/CAD rallied throughout the Asia session, however gains were capped at 1.2466 CAD. The cross has been on a strong downtrend through the European session and positive data added to the selling momentum.

The pace of new housing starts in Canada climbed to a seasonally-adjusted annual rate of 154,700 in March, after coming in at 136,100 in February, the Canada Mortgage and Housing Corporation reported.

The rise represents a 13.7% month-over-month increase, though starts remain down 35.7% from a year ago. Economists had expected a fall to 130,000 in March.

USD/CAD lost almost a cent following the release and remains near the bottom of Wednesday’s trading channel at 1.23 CAD.

Shaun Osborne, chief currency strategist from TD Securities, said markets are shifting expectations of quantitative easing from the Bank of Canada. He said the BOC not expanding its balance sheet in April would be bullish for the Canadian dollar.

Although Thursday’s employment data provides some risk to the loonie, he said there is a strong possibility USD/CAD will test support at the 1.22 (CAD) level.

“If you look at the trend, anything above 1.24(CAD) is attracting U.S. dollar sellers,” he said. “I think 1.22 (CAD) is going to an important base in this recent consolidation period. If we break below 1.22 (CAD), I think we could test 1.15 (CAD) very quickly.”

Currency strategists from RBC Capital Markets are hesitant to look for further gains in the Canadian dollar ahead of earnings seasons.

“We continue to urge clients to focus on equity price moves as the main catalyst for price direction in USD/CAD, as risk aversion remains at the forefront of the market decision-making process,” said George Davis, chief technical strategists at RBC Capital Markets. “After weak earnings from Alcoa yesterday, more earnings weakness would leave stocks vulnerable to the downside.”

Elsewhere in foreign exchange, the U.S. dollar was down 0.74 to 99.69 against the yen and the Dollar Index was up 0.073 to 85.361.

The euro was down 0.0010 to 1.3262 against the U.S. dollar, down 0.0023 to 1.6397 against the Canadian dollar, up 0.0018 to 0.9026 against the pound sterling and was lower by 1.11 to 132.18 against the yen.

The pound sterling was down 0.0039 to 1.4692 against the U.S. dollar and down 0.0061 to 1.8165 against the Canadian dollar.

Quiet Day Provides Little Direction for Gold Prices

It was a relatively quiet day for gold prices, which traded in a $13 dollar range on Wednesday and were nearly unchanged late in the session.

Gold initially made gains but it later pulled back. Most recently, the front month gold contract at the Chicago Board of Trade was down $1.40 to $881.80 per ounce.

Equity markets provided little direction for gold. North American equities closed up about 1% on the day.

Jon Nadler, investment products analyst at Kitko, said he does not see much positive news in gold markets. According to media reports, retail gold volume in Abu Dhabi fell by an annualized rate of 20% in the first quarter of 2009.

Nadler pointed out that as long as demand remains low, gold prices will continue to be weak.

“Even the most optimistic forecasts being offered at this juncture do not envision gold getting to much beyond the $1K to $1.1K mark,” he said.

With gold trading below strong resistance levels, commodity strategists at Barclays Capital are also wondering if investment interest will be enough to support prices in the long run.

They are expecting physical supply to fall by 2.5% in 2009. They said that with the muted supply, the market appears in balance.

“In our view, gold’s price trajectory firmly rests in the hands of investors,” they wrote in a research note. “Although the investment horizon of the fresh investment demand has not been tested and remains a key potential downside risk, in our view, a weaker dollar and a potential build in inflation are likely to spur investors to increase their exposure to gold and allow prices to gain upward traction once again.”

Oil Prices Move Higher Following DOE Report

Oil made modest gains following the U.S. weekly supply report on Wednesday.

Following the Department of Energy report, WTI shot up over $3, hitting session highs at $51.29 per barrel but prices later pulled back and are up 89 cents to $50.04 per barrel. Oil prices were on a strong downtrend overnight, hitting session lows of $47.38 just ahead of the North American open.

The Department of Energy reported that crude oil inventories rose by 1.645 million barrels for the week ending April 3, relatively in line with the consensus of 1.5 million barrels. Gasoline inventories are also on the rise, showing a build of 656,000 barrels, higher than the consensus expectation for a withdrawal of 1.4 million barrels.

The surprise in this week’s report was in distillate inventories, which showed a withdrawal of 3.354 million barrels, much more than the 600,000 barrel draw economists were forecasting.

“I think prices went higher because traders saw that the report wasn’t as bearish as they were expecting,” said Phil Flynn, energy analyst from Alaron Energy. “I think if the markets were focused on fundamental data oil would be trading around $25.”

Although oil remains near the top of its five-day range, Flynn said he is not reading a lot into today’s move. He said there is relatively light volume as traders prepare for the Easter holiday, and markets will probably remain directionless until after the holiday.

All data taken at 4:14 p.m. EDT.

By Adam Button, abutton@economicnews.ca, edited by Ernest Hoffman, ehoffman@economicnews.ca

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Posted in Categories: Australia, Canada, Commodities, Economy, Eurozone, Japan, Releases, Stocks, UK, USA.

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