News on the economy for the week of February 2, 2009, was almost all negative—with the January employment report showing the recession sharply worsening over the last three months. Fiscal stimulus is needed and passage appears to be imminent this week.But whether it is the right mix remains to be seen, and it also remains to be seen if the stock market can muster some lasting gains. Expect continued volatility.

Consumers are now pulling the economy down along with housing, and this is likely to continue until employment stabilizes.Meanwhile, inflation is a non-issue and the Federal Reserve can afford to keep pumping the money supply–for now.Fixing the housing market should be a top priority. Let’s look at the major market themes, and what the focal points will be this week.

Stock Indexes

Stocks rallied for the first week in five last week, even though it was another awful week for the economy.Payroll employment has plummeted by over half a million for three consecutive months, the unemployment rate spiked to a 16-year high at 7.6 percent in January, and personal income dropped. Regardless, major stock indexes saw gains of about 3 – 8 percent for the week. The markets largely ignored the abysmal employment report on Friday, February 6, and focused on plans to repair the credit markets and to juice the economy with fiscal stimulus. Bank stocks were boosted by optimism about a planned speech this week from Treasury Secretary Geithner on the Administration’s financial rescue plan.Also lifting bank stocks last week was news that Bank of America CEO Ken Lewis bet a million dollars of his own money on struggling Bank of America.

Stocks looked completely past last week’s dismal economic news and focused on hopes the further fixes for the credit markets and fiscal stimulus will work.However, I think market participants may be a little too optimistic about the timing, and may be underestimating the depth of the problems to be corrected.

Turning to stock index futures, the March S&P 500 contract closed higher Friday, February 6, moving above the 20-day moving average at 842. Technical momentum indicators, Stochastics and the Relative Strength Index (RSI), are looking bullish. On a continued rally, I’m targeting 875, with immediate resistance at 868. A close under 806 (last Monday’s low) could suggest a short-term top has been posted. Near-term support is at 837.

For the year-to-date, major indexes are mixed as follows: the Dow Jones Industrial Average, down 5.6 percent; the S&P 500, down 3.8 percent; the Nasdaq, up 0.9 percent; and the Russell 2000, down 5.8 percent.

Credit Markets

Treasury yields firmed slightly last week despite dreadful economic reports—including very negative employment and personal income reports. Stocks kept their profound cheery disposition for the week, weighing on bond prices. Also, the credit markets are really just beginning to soak in the amount of supply that the Treasury will be dumping in coming years and even this coming week.Finally, the Treasury market also concluded that fiscal stimulus increasingly appears to have some notable impact on the economy once underway.This also supported a firming in rates.

The big picture is that near-term rates are still being held hostage by the Fed’s quantitative easing, keeping short-term rates close to zero. Longer-term rates are being boosted more by increased supply than by stronger economic growth – although the latter is having some impact on rates.

The Fed does not seem too worried about inflation right now. Easing crude oil prices have certainly helped. Headline inflation as measured in the Consumer Income and Spending (PCE) report for December slowed to +0.6 percent from +1.4 percent the previous month, while core PCE inflation slipped to 1.7 percent from 1.9 percent. The core inflation number clearly is within the Fed’s implicit 1.5 – 2 percent inflation target, but I view the headline number as actually well below the Fed’s comfort zone.The core year-ago pace is at its lowest since the 1.7-percent pace seen in January 2004.


Across the pond, the European Central Bank (ECB) left its key interest rate at 2 percent (as widely expected), preferring to postpone any further interest rate cuts to March when the new staff forecasts will be available. ECB president Jean Claude Trichet has repeatedly said that when the ECB reduced its rates in January, the move already took into consideration an expected further decline of economic activity and inflation later in the year. Trichet has said that February is not considered “an important meeting for policy making.”

The Bank of England lowered its key interest rate by 50 basis points to 1.0 percent — a record low in the Bank’s 315 year history. Currently rate cuts are not being passed on to consumers as the central bank attempts to bring rates to near zero levels and focus on a “quantitative easing” strategy. However, there is considerable debate about whether it will ultimately go that far.

The U.S. dollar was down against the yen currency and euroafter the Bureau of Labor Statistics reported that the U.S. unemployment rate was the highest in 16 years. I think the terrible data was viewed as spurring passage of the economic stimulus package, and in turn reducing the dollar’s safe-haven demand.

Financial Fundamental Reports:Week of Feb 09 – Feb 13, 2009







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Good luck and good trading!

Jeff Friedman is a Senior Market Strategist with Lind Plus. He can be reached at 866-231-7811 or via email at Join Jeff for his monthly webinar, Friedman’s Futures Forecast, by visiting Lind-Waldock’s events page.

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