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7/30/2012 9:12 AM
The Focus Stays on Europe
By WSS Research Team
By Carlos Guillen
After a rather encouraging end to the trading week, today's premarket activity appears to be indecisive as equity futures are moving around a flat start to trading. Last week it was all about the hope that the Fed and the European Central Bank (ECB) will step in to provide the liquidity needed to fuel economic growth, with the ECB taking a firm stance on doing whatever it takes to keep the European Union together. Other European nations including Germany, France, and Italy have also made similar comments on their intentions to stand by their commitments to the single euro currency. And this week the hope continues, with Italian bonds showing strength at the most recent auction.
Clearly the most encouraging bit of news before the start of trading was that Italy's 10-year funding costs fell below 6 percent for the first time since April and Spanish yields pulled back from a peak hit last week. Both of these improvements in borrowing costs are the result of the continuing hope that the ECB will make stronger efforts to respond to the current debt crisis that has been scaring fixed income investors for the past two years, so at the moment demand for Italian and Spanish bonds is ramping higher.
Of course, all is still not well in the European Union, and the ECB will be meeting this coming Thursday to discuss the possibility of further action. As we all know, the main impediment at the moment continues to be Germany as it remains opposed to a resumption of the ECB's secondary market bond-buying program. Clearly, the next couple of months will be full of suspense and will determine the fate of the Euro currency.
This week, the highly awaited government jobs report will be presented, but most expect the report to be uneventful with the unemployment rate remaining flat at 8.2 percent and nonfarm employment growth still just inching higher, not enough to really make an impact on the economy.
So with the Dow Jones futures trading fairly flat in the premarket, it is likely that today will be a calm trading session, with all eyes continuing to focus on Europe.
Waiting for the Fed
By David Urani
Coming into this week I get the feeling it's going to be all about Wednesday, when the Fed announces whether it's going to enact any more easing. Of course, we've heard this story a few times already in the past couple of months and each time the hopeful market has been denied by Mr. Bernanke. The fact is, the Fed needs to have solid evidence that the economy is reversing before it prints money and in its previous meetings there wasn't enough to suggest we may be contracting, although it's been clear that we are decelerating. I'm not sure where the Fed's threshold is, although you can largely pin its decision on two major factors: employment and inflation (or lack thereof).
As far as employment goes, we haven't gotten a new jobs report since the last time the Fed met. That being said, the BLS report for July comes out this Friday and I wouldn't necessarily put it past the Fed to get an inside scoop on it before it comes out. In a way, we might see the market use Wednesday's Fed meeting as a predictor of Friday's jobs report. But nobody can know for sure if the Fed does have this kind of inside intelligence.
So the question is just how bad does it have to be anyway? I think if employment goes negative there would surely be some easing although by looking at the latest figures I don't think it's that bad yet. Looking at the weekly jobless claim figures, although they've been volatile this month (partly because of the holiday), if anything they seem to have improved a little.
And looking at inflation (actually, Bernanke will be more worried about deflation), we see that oil, gold, and other commodities have largely been flattish. Yes, food prices have surged but that's a reflection of weather rather than inherent price instability.
Given these factors, I'd say Bernanke is still pretty much at the same spot he was last time, as far as the economy is concerned. So if I were the Fed, I wouldn't see much further reason to ease now. Nevertheless, there have been rumors, and the market is going to come into this week with its hopes high once again.
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