Weekly markets commentary – June 9, 2009
David Joy — Chief Market Strategist, RiverSource Investments
Inflation Fears Premature
In late trading on Monday, the 10-year Treasury note was trading at a yield of 3.90 percent, up six basis points from its close on Friday. Its yield had already risen 12 basis points on Friday, after the May employment report showed far fewer lost jobs than anticipated. Never mind that the unemployment rate climbed to 9.4 percent, or that the length of the average work week slipped.
The employment report stoked fears that, in combination with a flood of government debt, inflation will soon be headed higher. The two-year note yield spiked higher by 25 basis points after the jobs report. Treasury auctions of 10 and 30-year paper this week will only add to the concern.
However, it seems premature to suggest that inflation will emerge as a serious threat anytime soon, with record unused production capacity, subdued wage growth and sluggish demand. Furthermore, the Federal Reserve is not about to risk jeopardizing a fragile recovery just as it may be gaining traction by raising interest rates, as the fed funds futures market is now suggesting.
While stocks drifted lower on Friday, for the week they rose smartly. The S&P 500 Index gained 2.3 percent, the Dow Jones Industrial Average added 3.1 percent and the Nasdaq Composite Index climbed 4.2 percent. And after some early weakness, stocks closed mostly unchanged on Monday.
Last week's strength was concentrated in industrials, consumer discretionary, and technology stocks. Telecom, healthcare, and financials were generally mixed.
Whereas volatility has been increasing in the bond pits, it remains subdued in stocks. The Chicago Board Options Exchange Volatility Index (VIX) ended the week at a reading of 29.6, up fractionally from 28.9 the prior week. For the year it is down 26 percent, although one year ago, it was trading near 18.0.
The Week Ahead
This week's top economic reports include retail sales, the trade deficit and the Fed's Beige Book of current economic conditions. In addition, the University of Michigan Consumer Sentiment Survey is scheduled. Also, weekly claims for jobless insurance will be closely monitored for confirmation of the recent moderating trend.
This week will see the Supreme Court's response to the objection by Indiana pension funds to the sale of Chrysler to Fiat. The bondholders are objecting to the distribution of ownership in the new entity as an unlawful trampling of their legal standing as secured creditors. On Monday, Justice Ginsberg granted a stay. How this proceeds remains unclear, but its disposition will be watched carefully, particularly by those involved in the G.M. bankruptcy.
The views expressed in this report reflect the views of RiverSource Investments, LLC as of the date given. These views may change as market or other conditions change. Actual investments or investment decisions made by the firm and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed in this report. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance. Asset classes described in this report may not be suitable for all investors. Past performance does not guarantee future results and no forecast should be considered a guarantee either.
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
The Dow Jones Industrial Average (DJIA) is an index containing stocks of 30 Large-Cap corporations in the United States. The index is owned and maintained by Dow Jones & Company.
The NASDAQ composite index measures all NASDAQ domestic and international based common type stocks listed on the Nasdaq Stock Market.
The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a widely used measure of market risk. It shows the market's expectation of 30-day volatility. The VIX is constructed using the implied volatilities of a wide range of S&P 500 index options.
It is not possible to invest directly in an index.
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