After trading in negative territory for much of the day, U.S. equities grinded modestly higher and finished in the black. The S&P 500 has now closed above the technically important 1110 level for three consecutive days and now sits at 1116.04. Recall that the 1110 level represented a key resistance level to the upside and now represents a key support level to the downside. As mentioned in Wednesday’s piece, consolidation above that level could propel equities higher in coming days and weeks. In regards to today’s market, futures are pointing to a flat open on what could be a volatile trading day due to quadruple witching. Recall that quadruple witching is defined as a day on which contracts for stock index futures, stock index options, stock options and single stock futures (SSF) all expire.
On the economic front, some of the data this week has been weaker than expected. Specifically, Wednesday’s housing starts and building permits disappointed while yesterday’s jobless claims and Philly Fed readings fell short. The gains that we need to see in the jobless claims data have stalled and have been creeping slowly back to the 500k number after hitting a cycle low of 439k on February 5th. We clearly need to see improvements in this reading and move below the 400k level in short order. As we have been stating for some time, the jobs picture must improve to validate this recovery and ensure its sustainability.
On the treasury front, yields moved lower again yesterday as market participants re-price the outlook for interest rates. As you know, we don’t expect the Fed to raise rates well into 2011 and economists across the street are reassessing their own forecasts. In fact, JP Morgan’s chief economist revised his forecast for the first Fed tightening not to occur until the 4th quarter of 2011. It is looking more and more likely that the Fed will not be raising rates for some time and the yield curve is supporting that. The curve continues to flatten with the 2-year/10-year spread declining to 248 bps, down from roughly 300 bps not long ago.
On the fixed income front, mortgage backed security prices continue their ascent touching new records on a daily basis. We continue to have clients sell into this strength, booking gains before quarter-end. In the past few days, we’ve started to see a divergence between tax-exempt and taxable muni yields. Recall that both tax-exempt and taxable muni yields had been declining for some time. However, an abundance of taxable muni supply has caused those yields to move higher, representing a better entry point and decent relative value play versus tax-exempts.