Market Analysis

Today the stock market had its worst single day performance since October with the Dow Jones Industrial Average losing almost 370 points.  The bond market rallied and we saw our rate sheets improve by approximately 1/8th point.  The trigger of the sell off was the Institute of Supply Management's January non manufacturing index which dropped to a level representing a contraction in the service sector which represents activity in approximately 90% of the economy.  The drop from December to January was the sharpest decline on record for that index.  The bond market has now fully priced in a .50 cut at the March 18 Fed meeting.  The hopes for interest rates to move lower hinge upon continued negative economic news particularly on the jobs front, an expectation that the economy is not on the brink of a rebound (that the Fed rate cuts and stimulus package will not work quickly) and tame inflation numbers.  The inflation numbers are particularly important because investors count their returns from bonds in post inflation dollars - a yield/rate less than the level of inflation is a loss.  Tomorrow morning will be very interesting to watch in both the stock market and in the bond market where the Treasury will be auctioning off $13 billion in new 10 year Treasury notes.   Investor appetite for these notes will be a test for whether bond prices can break through the ceiling at which they have been hovering or whether they will move again to lower prices (higher rates) to attract demand.
Posted by Matthew Breston on February 5th, 2008 8:46 PMPost a Comment (0)
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