Markets rally on Fed interview, brush aside bad indicators

Wednesday, June 01, 2005

Wall Street on Wednesday brushed aside a new array of bad indicators and focused on statements of Fed Dallas president Richard Fisher in today's Wall Street Journal (subscription). "We've gone through eight innings here, 25 basis points an inning. The next meeting in June is the ninth inning. We'll take a look after that. We may have to go into extra innings in this contest against inflation," he said in an allusion to Baseball rules. While the Dow rose one percent to 10,569 points, the bond market rallied to 13-month highs, bringing the 10-year yield down to 3.90 percent after it had fallen below 4 percent the day before.
Market participants attributed the surge in bonds both to Fisher's remarks and fears of another rejection of the EU constitution in today's Dutch referendum, where polls indicated up to 60 percent "no" votes. European bourses followed Wall Street nevertheless, with the Amsterdam exchange eking out the strongest gain of 1.9 percent.
The German magazine "Stern" reported on a secret meeting, where German Finance Minister Hans Eichel and Bundesbank President Axel Weber allegedly discussed a possible dissolution of the European monetary union. Weber "is not taking part in any such absurd discussion," his spokesman at the central bank, Wolfgang Moerke, said in an e-mailed press release, Bloomberg reported. The report nevertheless knocked the Euro to a new 8-month low of 1.2215 dollars.
Markets seemingly disregarded that all of today's US data have come in below expectations. From, "Factory activity in the United States decelerated in May for the sixth straight month, the Institute for Supply Management reported Wednesday. The ISM index fell to 51.4% in May from 53.3%in April. The decline was sharper than expected, but stayed above 50, the threshold for growth in the factory sector. The consensus forecast of estimates collected by Marketwatch was for the index to slip to 52.1%. In other economic data, spending on U.S. construction projects increased 0.5% in April, the Commerce Department estimated. The rise was lower than the 0.7% expected by economists. This was after yesterday's release of the Chicago PMI had come in far below expectations as well, whereas consumer sentiment had risen.
Markets also ignored oil's 4-percent rise above the 54-dollar mark after it had traded below 50 dollars last week. A silvery glitter was also seen in precious metals markets where silver traded 2.5 percent higher to 7.40 dollars an ounce. I had alerted readers in this post about a possible move. Gold stopped its downside trend despite the continued strength of the dollar. Let's wait until gold lease rates will indicate a resumption of the 5-year uptrend.
Fed Dallas president Fisher said in the WSJ, he's more worried about inflation than about the economy. He is one of the voting members in the FOMC. He rejected suggestions that the flattening yield curve indicates worse times for the economy (a worry The Prudent Investor shared here), saying that it rather represents a vote of confidence in the FOMC and chairman Alan Greenspan's leadership.
GRAPH: The US Treasury yield curve flattened further today.


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