Fed Backpedals On Recent Communications

Markets are nicely higher this morning on a combination of dovish comments from NY Fed President Dudley as well as some better than expected economic news.  The Dow is up over 100 points once again in early trading.

Dudley spoke this morning and basically backpedaling on the Fed's recent communique and saying that market expectations of an earlier rate hike is "quite out of sync" with the FOMC.  He also said that QE could increase if there aren't improvements in the labor market.  Investors have been solely focused on how soon QE would end, but it is looking more and more like that won't be anytime soon.  PCE inflation is also still well below the Fed's target.

There was also some positive economic news this morning.  Pending home sales rose a better than expected 6.7% in May.  Personal incomes rose 0.5% while personal spending rose 0.3%.  The savings rate has gone from 2.1% at the beginning of the year to 3.2% currently.  So there has been a pullback in consumer spending that could reverse and add to GDP in the second half.

Markets in Asian were mostly higher overnight.  Japan rallied 3.0% but China couldn't bounce again.  The PBOC again refrained from injecting liquidity into the banking system but said it would provide funds to large lenders.  That helped the 1-week SHIBOR rate ease 52 bps to 6.88%.

Europe's markets are modestly higher today.  Germany's unemployment held steady at 6.8%.  And the UK's Q1 GDP rose 0.3%, as expected.

The 10-year yield is easing back after Dudley's remarks to 2.50%.  And the volatility index is down another 3% near 16.75.

The dollar is higher for a 7th straight day, but commodities are bouncing a little.  Gold prices are flat near $1230 while oil prices are higher around $96.45.  I wonder how quarter end window dressing may have pushed gold lower as portfolio managers don't want to show they held gold during such a bad quarter.

Trading comment: The market is now getting its 3rd day bounce after reaching very oversold levels on Monday.  At the time, we said we thought we would likely see a bounce into quarter end but that we would use it to get more defensive.  That's what we are planning for today.  The SPX bumped its head on its overhead 50-day average this morning near 1620.  We think the 50-day will act as near-term resistance on this try.  We will have to see how trading goes in early July.  If the market can pullback slightly and take another shot at 1620 we might see higher levels for a little while.  But our big picture thesis is still that we will see more of a correction into the summer.