Weekly Financial Market Recap and Outlook

by Jeffrey Friedman

Last week was one of the most volatile ever in just about all the futures markets. Economic weakness triggered by subprime problems showed signs of spreading beyond housing and into manufacturing. Keep in mind that the Federal Reserve’s interest rate cuts do have a lag before they seep into our economy, and the Fed took some further actions last week to shore up the markets, including an expansion of the discount window and another 75-basis point reduction in the Federal funds rate.

The threat of inflation could be making the Fed uncomfortable, and that might have kept the Fed from delivering the full one-point cut many market participants had expected at the conclusion of last week’s policy meeting. The fact the Fed was a little more cautious on the inflation front caused a rebound in the dollar, and a sell-off in commodities. The U.S. currency has rebounded almost 3 percent from a record low reached March 17, and investors were unwinding the “safe haven” commodity inflation play. Profit-taking ensued in markets like crude oil, corn, and gold. These trend reversals were a key development last week.

Crude oil prices faced a big plunge Wednesday, March 19 of $4.94 a barrel – the sharpest daily drop in 17 years. A surprise bump up in the dollar – due to the Fed’s cutting “only” 75 basis points instead of the expected 100 – pushed oil prices down along with the weekly oil inventories report that showed a drop in demand for gasoline. The report of weakened demand continued to weigh on prices Thursday due to increased worries over the impact of a slowing economy. If the dollar starts to back off from its recent revival, commodities will be back to their bullish ways.

The latest data on inflation at the wholesale level (Producer Price Index, or PPI) indicate that inflation is still entrenched. It is being boosted by a surge in commodity prices and is not yet responding to a softening economy. Commodity prices finally corrected after the Fed meeting last week, dropping more than 8 percent, as measured by the DJ-AIG commodity index. Maybe the PPI is lagging? The year-on-year rate for the overall PPI stood at up 6.8 percent in January (seasonally adjusted) from up 7.7 percent in January. The year-on-year core rate increased to up 2.5 percent in February from up 2.4 percent in January. This is the highest rate for the core since 2.5 percent seen in September 2005.

The bottom line is that inflation is apparently somewhat more entrenched than the Fed had hoped. Part of the inflation problem is that the dollar has depreciated, making imported goods more expensive. Additionally, foreign economies are still robust, keeping prices under upward pressure.

The stock market ended the week on a positive note, posting the first weekly gain in a month. The S&P 500 rose 3.2 percent to 1,329.51 last week, while the Dow Jones Industrial Average rose 3.4 percent to 12,361.32. For the year, major indexes are down as follows: the Dow, down 6.8 percent; the S&P 500, down 9.5 percent; the Nasdaq, down 14.9 percent; and the Russell 2000, down 11.0 percent.

Treasuries were mixed. On the short end of the yield curve, the three-month Treasury bill yield fell to its lowest level in more than 50 years at 0.387 percent last week-- lower than the 9/11 attacks when flight-to-quality was paramount. People seem to feel they need more safety in Treasuries today than when we were attacked. Something worth pondering.

S&P Futures

Turning to the futures market, June S&P futures closed higher before the Easter holiday break, and technical momentum indicators, stochastics and relative strength index (RSI), are turning bullish. Maybe we are closing in on a bottom and should consider buying dips. A close above 1344 in the June S&P contract is needed to show the low has been posted. I still see the market facing a down year, but a recovery by year-end should help limit losses. If June extends this month’s decline, the 2006 low at 1230 is the next downside target.

Dollar Index Futures

The June Dollar Index futures closed sharply higher on Thursday and above the 10-day moving average at 72.75, suggesting that a short-term low has been posted. Stochastics and the RSI are bullish, signaling that additional short-covering gains are possible near-term. Closes above the 20-day moving average at 73.75 could confirm that a short-term low has been posted. If June extends this month’s decline into uncharted territory, downside targets will be hard to project. First resistance is at 73.45 then at 73.75. First support is at 71.20.

Financial Fundamental Reports: Week of March 24 – March 28, 2008

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

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