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Morning Cup of Jo: The Fed, New Quarter, Global Concerns

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The prudent course of action is to take things step by step as we sort through it all.

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"News, like a fish, should be consumed when fresh; otherwise it is not only indegestible but unspeakable." -- James Reston

Key Points:

  • Last Thursday a widely expected 25 basis point increase in rates caused a positive response in the equity markets just as the market hovered near critical levels.
  • There are a number of issues currently serving as cross-currents which have traders on edge. Global monetary tightening, geopolitics (Iran, North Korea), earnings season (kicks off next week), and economic data (Friday brings employment data) which could provide clarity on the battle between economic growth and inflationary pressures. These combined will create volatility and keep investors on their toes.
  • Technically, there is formidable overhead resistance and the recent action suggests we could see some back and fill action.




Market Commentary:

I hope everyone had an outstanding 4th of July celebration as I did. Not only was it a pleasure spending time with friends and family, but watching the launch of shuttle Discovery from my backyard with my wife and son was a memory that will last a lifetime.

Last Thursday, the markets found decent footing as Chairman Bernanke directed his third FOMC meeting and raised rates for the 17th straight time to 5.25%. As mentioned in Friday's Week in Review, the recent technical action has adjusted the Eye on the Ball levels above - good news for the bulls. However, due to the end of the quarter run-up, the markets are more than likely going to do some back and fill action in the near term. Even though the 'four sisters' held up when presented with a possible break of the three year trend, there is still plenty of overhead resistance to contend with this quarter.

As we enter the third quarter, there are a number of complex cross-currents that will impact the tape. The technicals suggest continued choppiness on the road ahead. In addition, there will be two more FOMC meetings, earnings season which kicks off next week with Alcoa (AA), as well as a slew of economic data (which remains critical for a data dependent Fed) – such as this Friday's employment data. To reiterate our comment in the WIR; the three most important pieces of economic data which will affect the tape are the CPI, GDP and Non-farm Payrolls (and/or Wages). This was evident in yesterday's market action as the ADP employment survey suggested non-farm payrolls rose by 368K and the consensus for tomorrow's actual number is 165K. "Too Hot To Trot!" (For a complete list of pending data, earnings, industry and company events for the week don't forget to link to Tuttle Asset Management's new service "On the Calendar.")

Nonetheless, this wasn't the only issue affecting the market yesterday. The global picture is also providing a great deal of noise. Wednesday's developments in North Korea and the firing of test missiles will be on the mind of traders as well as Iran's continued refusal to suspend uranium enrichment. Those types of macro concerns again raised the price of Crude to an all time high close yesterday ($75.19) and may provide some reason for pause as investors wait for events to unfold further.

Also on the global front, the BOJ (Bank of Japan) could raise interest rates next week for the first time in six years from zero to 0.25%. Last week's Jo discussed the issue of global monetary tightening and that the potential risk "overdoing it" could result in a global slump. Liquidity is a key driver of financial markets in the short run; the drop-off in May/June is a prime example.

The FOMC language last week provided a short term lift as traders saw the writing on the wall for a potential pause to rate hikes. The debate about how to balance economic growth while staving off inflation remains a key consideration for traders and policymakers alike. Keep in mind the CRB index (Reuters Commodity Index), which is one of the most widely-used indicators for commodity prices, is trading at the highest level since its inception in 1956. It's also up just over 100% since October of 2001.

With all of these issues looming on the minds of traders, the third quarter should be an interesting and potentially volatile one. The prudent course of action is to take things step by step as we sort through it all.

In remembrance of Rocco Zambri (November 11th, 1911 – July 6th, 2005) – my grandfather.

Stay tuned & good luck!

Until next time…

KAT

No positions in stocks mentioned.

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