[Chart courtesy of MarketWatch.com]
The Major Equity Index ETFs continued yesterday’s momentum to close higher with all eyes feasted on tomorrow’s conclusion of the Federal Reserve’s two-day monetary policy meeting.
The Dow Jones Industrial Average closed 138 points (0.9%) higher at 15,318, the Standard & Poor’s 500 Index rose 13 points (0.8%) to 1,652, and the Nasdaq Composite added 30 points (0.9%) to 3,482.
All ten sectors ended with solid gains, but today’s rally was predicated on the strength of cyclical names. The industrial space rose 1.3% amid outperformance in transportation and defensive stocks. Dow component General Electric settled higher by 2.4% after forging a strategic partnership with Accenture. Discretionary stocks also made a significant contribution to today’s rally as the sector displayed broad strength.
The lone pocket of weakness was among homebuilders as the group ended in mixed fashion following today’s housing data. The lack of a solid rebound after the 4.2% decline in April could signal a slowdown in overall construction levels. Surprisingly, the financial space was more tentative in its advance, posting a gain of 0.6%. Today’s rise helped the sector erase its month-to-date loss. Telecom ended higher by 1.3% to bring it June return to 4.1%.
In economic news, the Consumer Price Index (CPI) edged up 0.1% in May, below the consensus of 0.2%. Food prices fell 0.1%, its first decline since July 2010, while energy prices rebounded 0.4%, following sharp declines in the prior two months. Core CPI picked up 0.2%, in line with expectations. On a y/y basis, CPI is up 1.4%, below the average 2.5% per year since 1991.
Core inflation has slowed to 1.7%, the least since June 2011. Both measures are below the Fed’s longer-term inflation target of 2.0%. Combined with a slow labor market recovery, this argues for continued monetary accommodation from the Fed.
Meanwhile, housing starts rose 6.8% in May, its third increase in the past four months, to a 914,000 unit annual rate, but below the consensus of an 11.4% gain to 950,000 units. Building permits fell 3.1% to 974,000 units annual rate, nearly in line with the consensus of 973,000 units. On a y/y basis, both housing starts and permits continue to rise at double-digits, as the housing recovery gathers strength.
The Fed has said its goal is to target its benchmark interest rate near zero to lower the unemployment rate to 6.5 percent as long as inflation stays below 2.5 percent. The Fed statement will be released at 2 p.m. ET with a press conference scheduled for 2:30 p.m. ET. If in fact Bernanke signals any clear signs of slowing down its monetary policy, this could likely be the end of this five-year bull market.
There is no sense in guessing an outcome as the type and severity of the language used can have a significant impact on Wall Street’s reaction. In the meantime, our Trend Tracking Indexes (TTIs) inched higher with the Domestic TTI reaching +3.27% while the International TTI settled at +6.35%.