Friday, June 29, 2007

Markets Bounce Early: Is It Sustainable?

The markets are getting a strong bounce in the first hour of trading, but as we saw yesterday, can it be sustained?

Hard to say. I am always skeptical of strong openings in the market. I much prefer strong closes. But since today is quarter end, we might see sustained buying into the closing bell.

The FOMC held rates steady yesterday, as expected. They also spoke about inflation pressures again. This is just the Fed trying to jawbone the market. That is the stage of the interest rate cycle where we find ourselves. The Fed will continue to jawbone the market, and talk about inflation, even as we get evidence that inflation pressures are easing.

To wit, this morning's core PCE inflation rate was just +0.1%, pushing the year/year rate down to +1.9%. This is below the Fed's 2007 inflation forecast of 2.0-2.25%. The bond market took notice, and pushed the 10-year yield down as low as 5.05%. I believe we will see inflation remain low, as the slow economic growth continues.

Asia was mixed overnight, with Japan up and China down. As for the Yen, it has plummeted back down the last 3 days, erasing fears of the carry trade unwinding.

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