Weekly Financial Market Recap and Outlook

by Jeffrey Friedman

Last week, inflation was the focus, and with crude oil prices heading toward more record highs, it looks like the second-half of the year could be more sluggish than we had hoped. Let’s take a look at price action in the financial markets last week, and how we might approach this week trading futures.

Inflation reports took center stage last week – namely the release of the May consumer price index (CPI) and import prices. The Federal Reserve’s uninspiring “Beige Book” report on regional economic conditions, combined with hawkish comments from Fed speakers, also got plenty of market attention. 

Economic reports last week presented a picture of an improving economy as consumers did their part to keep things going by spending their tax rebate checks. The Commerce Department reported U.S. retail sales increased 1 percent in May, following a revised 0.4 percent advance the prior month However, I think consumer fundamentals still do not look that good. While core CPI inflation has not accelerated, we can’t deny higher food and energy prices are hitting our pocketbooks. Last week, the Labor Department reported the core CPI rate was at 0.2 percent in May, but including food and energy, the overall CPI rose 0.6 percent. With the Fed now refocusing on taming inflation, a sluggish second half may well be exactly what the Fed wants. Treasury interest rates were up significantly for the week, with the 2-year and 10-year yields at their highest since the first of the year.

Stock Indexes

Stocks were generally were down lastweek, with the Dow Jones Industrial Average being an exception. A key factor behind the slump included hawkish Fed speakers bluntly stating there are no more rate cuts coming and that fighting inflation is the top priority. New York Fed President Timothy Geithner and Dallas Fed President Richard Fisher both made comments that the Fed may have to start raising interest rates later this year. In addition, the financial sector remained shaky, with disclosures of further possible losses by financial firms, including Lehman Bros. Of course, sky-high high crude oil prices also continued to take their toll. Crude oil prices spiked $5 per barrel mid-week after oil inventories were reported down much more than forecast. However, a rally on Friday, June 13, helped to lessen the damage for the stock market for the week. 

Turning to futures, the September S&P 500 index closed higher on Friday, June 13, due to short covering, as it consolidated some of last week’s earlier decline. Technical momentum indicators, the Stochastics and the Relative Strength Index (RSI), are oversold but are neutral to bearish, signaling that sideways to lower prices are possible near-term. If June extends last week’s decline, I see the 62 percent retracement level of the March-May rally at 1325 as the next downside target. Closes above the 20-day moving average at 1381 are needed to suggest that a short-term low has been posted.

For day traders as we kick off the week, watch for resistance at 1371. Early, fast moves lower would support a mid-session recovery.

Crude Oil

Crude Oil prices whipsawed last week, but NYMEX July crude oil futures netted a decline of $1.89 per barrel. Prices fell the most the first two days of the week, dropping $3 per barrel on Monday, June 9, and $4 per barrel Tuesday June 10. In addition to profit-taking, gains in the U.S. dollar and a report of increased production by OPEC weighed on prices. Oil prices rebounded by mid-week, surging $5 per barrel on Wednesday, June 11, on news that U.S. inventories had fallen much more than expected. Saudi Arabia’s oil minister also indicated that Saudi Arabia would be boosting production somewhat. Despite helpful comments from Saudi Arabia, oil prices remain quite high, reflecting the view that world-wide demand is still strong. And, this morning, crude oil is back up in record territory, with July futures surging anew above $139 a barrel. Speculators are still looking for any excuse to buy on dips, and a fire that shuttered an oil and gas field off Norway’s coast is among the latest bullish news catalysts. 

U.S. Dollar

The U.S. dollar rose against most currencies prior to the Group of Eight finance ministers meeting in Osaka, Japan on June 13 and 14. There were several reasons for the increase. The currency climbed to a one-month high against the euro currency on bets that G8 will signal they favor a stronger dollar. (Foreign exchange is not on the official agenda however.) Traders also think the Federal Reserve will increase borrowing costs this year. And on Friday, June 13, the euro currency weakened as Irish voters turned down the European Union’s Lisbon treaty — certainly a setback for the bloc’s plans to strengthen its global voice. While most of the focus remained on the euro, the yen sank against the dollar on persistent expectations of an interest rate increase later this year by the Fed to combat inflation.

The rhetoric in defense of the dollar intensified in the last two weeks. On June 3, Fed Chairman Ben Bernanke said that he’s aware of the impact a falling currency can have on price expectations. Several senior administration officials made it clear they wanted the currency to become stronger. Top officials at the Federal Reserve and the Treasury — and even president George W. Bush — threw their weight behind the currency, prompting a wave of dollar buying that swept on through the market early last week. Their comments were taken by the currency market as a sign that America’s political and economic leaders were working together to halt the currency’s decline. But markets paid closest attention to Bernanke, who warned that inflation risks were rising because of soaring energy prices. He said the Fed would “strongly resist” rising inflation expectations — his clearest remark yet that the central bank had finished cutting interest rates.

Looking at the U.S. Dollar Index futures, the September contract closed higher on Friday, June 13, extending the week’s rally. Stochastics and the RSI remain bullish, signaling that sideways to higher prices are possible near-term. If June extends last week’s rally, the 50 percent retracement level of the December-April decline is what I see as the next upside target. From a broad perspective, September futures need to close above 75 or below 71.50 to confirm a breakout of this spring’s trading range.

Feel free to call me to discuss particular trading strategies for these or other markets. Good luck and good trading!

Financial Reports: Week of June 16 – June 20, 2008

Date	CT	Release	For	Actual		Consensus	Prior
Jun 16	07:30	NY Empire State Index	Jun			-2.2	-3.2
Jun 16	08:00	Net Foreign Purchases	Apr			NA	$80.4B
Jun 17	07:30	PPI	May			1.1%	0.2%
Jun 17	07:30	Core PPI	May			0.21%	0.4%
Jun 17	07:30	Housing Starts	May			985K	1032K
Jun 17	07:30	Building Permits	May			955K	978K
Jun 17	08:15	Capacity Utilization	May			79.8%	79.7%
Jun 17	08:15	Industrial Production	May			0.12%	-0.7%
Jun 18	09:30	Crude Inventories	06/14			NA	-4560K
Jun 19	07:30	Initial Claims	06/14			NA	384K
Jun 19	09:00	Leading Indicators	May			0.0%	0.1%
Jun 19	09:00	Philadelphia Fed	Jun			-11.9	-15.6

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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