Investors are feeling a little bit more optimistic this morning
after yesterday's sharp sell-off in equities and pullback in
currencies. Smooth bond auctions in Italy and Spain helped to
relieve some stress on peripheral yields and lent support to the
EUR/USD. The Federal Reserve is gearing up for a monetary policy
announcement tomorrow and the latest round of U.S. economic data
should not affect their plans to caution investors about the
outlook for the U.S. economy. According to S&P/Case-Shiller,
house prices fell at a slower pace in February which is encouraging
but with prices still near a decade low, the housing market will
continue to lag the U.S. recovery. Further evidence of this was
seen in new home sales which fell 7.1 percent in the month of
March. This was the steepest decline in more than a year and erases
nearly all of the past month's gains. Consumer confidence also
declined according to the Conference Board whose index dropped to
69.2 from 69.5 in April. The only good news was the Richmond Fed
index which ticked higher in Feb and the House Price Index from
FHFA, which reported a small uptick as well. Unfortunately these
improvements will not be enough to offset deterioration in
confidence and decline in home sales. Since the last Fed meeting,
there has been plenty of evidence that the pace of recovery is
slowing. We don't expect Bernanke to jump to the conclusion
tomorrow that QE3 is necessary but he is certainly warming to the
idea.
Meanwhile earlier this morning, Canadian economic data turned
out much weaker than expected with retail sales falling 0.2 percent
in the month of February. After Monday's hot wholesale sales report
and hawkish comments from the Bank of Canada, investors and
economists expected a jump a consumer spending. Unfortunately
retail sales declined for the first time in 7 months due largely to
weaker demand for motor vehicles and parts. The Canadian dollar
fell sharply on the heels of the report but excluding autos,
spending was not nearly as weak. In fact, retail sales ex autos
rose 0.5 percent in February. While the latest consumer spending
report will not change the Bank of Canada's mind about about
raising interest rates this year, it will force them to reconsider
any plans to raise rates in June.
In the meantime, investors should keep an eye on the stock
market because a number of large market cap companies including
Apple will be reporting earnings today.