Thursday, April 19, 2007

Interest Rates and China

China announces that their economy is growing at a faster rate than expected. This has raised the concern that China is going to raise rates. They also announced that they expect to consume 10% more copper in the coming year. This also should mean a greater consumption of Nickel, which is used in stainless steel. Another commodity previously talked about is Lead. This consumption should grow also.

The news today has brought the focus back again to currencies and interest rates. Below is a chart of the Dow Jones Industrial Average with a comparison to the 30yr interest rate.

Do rates have to go lower for a rally to continue? Are rates going lower a good thing? Are rates actually going to go lower like people think? A case can be made for either point of view, but it seems that in our leveraged economy, consumers and the government are addicted to low interest rates, they are also addicted to the idea that rates will be lower in the future. For over a year during the last interest rate raising cycle there was an industry of pundits saying when the Federal Reserve would stop raising rates. Experts kept saying 4.25%, then 4.5%, and then... The fact remains that interest rates are important, but how low do they have to be for a company or a consumer to function in a profitable and prudent manner? If rates do go higher, it is because of growth and inflation. This means that commodities as well as products,and possibly services, are being consumed. It might not all be consumed here in the United States, but if U.S. growth slows it doesn't necessarily mean global growth is slowing.

This is a similar chart, except the interest rate in the bottom section is of the 5year treasury rate. The chart of this shorter term rate seems to be at a cross roads of both a longer term down trend line and a shorter term uptrend line. The economic data over the next few weeks should push rates one way or the other to give a greater idea of where things are going. How shocking would it be if rates went higher? Inflation is real, and slower growth is one thing, but slower growth with higher inflation is one of the Federal Reserve's greatest fears.

This chart shows the U.S. Dollar Index, with the 5yr interest rate in the lower pane. The Dollar Index is approaching some levels that will keep the world's attention. As it approaches there levels, watch for any change in the velocity of its move.

This chart shows the S&P 500. 1461.57 is a level to watch. The futures are currently down 7.70, so the market is above that level, but watch for some test of that number. Today's pivot is 1471.83, and we are already below that now. The other number to watch is the 3day rolling pivot, 1467.30. These numbers look like they will act as resistance today at this point. It is early however and this could turn around. Earnings this morning from some key financial companies will be over shadowed by the comments from China. Even with the sell off in February, the market has still not had what many consider a correction. The next ten days should be very key in determining direction.

The next post will go over how to approach the open and determine what direction a day should have. Some days are for offense, others it is best to play defense and look for better opportunities to show themselves.


Update for option expiration.

Volume should be decent today because of option expiration. Once today is past, next week things should move a little more freely. The chart above shows the pivot numbers for today, which are right around where we closed yesterday.

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