by Marc To Market
There are many events and economic reports that can roil the market in the days ahead. Yet, just as importantly, there are already forces at play that will shape market developments. Here are 8 thoughts about what to expect.
1. The US employment data failed to have much impact on expectations the timing of the Fed’s tapering. A recent news wire poll found a median expectation for it to begin in Oct and by about $20 bln. The key issue is whether the appreciation of this is sufficient to stabilize long-term US interest rates. It does not appear to be, which means, barring a significant surprise, US yields do not appear to have peaked yet. The 10-year yield can rise into the 2.25%-2.40% area. This need not be supportive of the dollar against the other major currencies, if it is part of a larger unwind of positioning.
2. The interest rate on a 30-year fixed rate mortgage has risen from 3.6% to 4.1% in recent weeks. It is first time its is above 4% in a year. Yet, the impact on the housing market may be mild. Rates are still not high, by nearly any metric. Activity has been lifted by participants, like institutional investors, that are less sensitive to marginal interest rate changes. Moreover, the real hindrance has not been the cost of credit, but the access. If lenders have greater confidence of a self-sustaining recovery, then perhaps they would increase their willingness to lend.
3. After testing 1600 last Thursday, the S&P 500 gapped higher on Friday. It extends from Friday’s opening and low print of the session (1625.27) to Thursday’s high (1622.56). Although there are several different types of gaps, this one appears to be one of two kinds. The first kind would be filled over the next day or two and that would suggest a near-term set back. The second kind will not be filled in the near-term and it is a type of break-away gap. After retreating by 5% over two-weeks, the gap signals the end of that move, which means new advance is at hand. We are inclined toward the latter and anticipate it will lead to new highs for the index.