David Fry's Daily Market Outlook

Fed Jawboning

As we’ve been saying: “Expect some tough talk from officialdom” regarding inflation and a desire to frighten gold bulls and dollar bears. But, tough talk followed by little action will only make gold’s reaction worse for them ultimately. Today Fed Governor Plosser said that the Fed might have to raise interest rates again to dampen inflation expectations. That produced a mild sell-off in gold but didn’t do much for the dollar.

The ECB meets tomorrow and the question becomes what they will do with their interest rates. They seem desirous on being tough. If so the dollar may take a hit.

The U.S. Treasury takes in excess tax receipts that it hasn’t spent yet and lends the funds out to its buddies the Primary Dealers. Gee, and they always seem to get the money at rates below the current Fed Funds rate. It’s good to be a primary dealer! This is generally “hot beta seeking” money and most likely routed to trading desks to play with.

The Fed does things a little differently, but nonetheless has been adding much to the system at good rates too! Today this little repurchase agreement was just a one day deal. Previous have been longer in term but equally generous in terms. If Fed Governor Plosser is serious, then perhaps they might at least make the lending rate equal to current Fed Funds rates wouldn’t you think?

Elsewhere is the housing market as reflected by the Homebuilders. The Street’s in love with them at the moment taking the Fed’s word that “tentative stability is building in the housing market.” But then today some economic heavy hitters from the real estate scene [excluding my favorite, the oppressed NRA chief economist David Lereah] weighed in negatively on the sector as reported by MarketWatch. I especially found David Seider’s [chief economist for the National Association of Homebuilders] comments illuminating: “The biggest problem the housing market faces is a seriously large inventory situation.” Oh, that’s the problem!

Aside from all this there was good news today in tech land. [It seems whenever we highlight a sector it does the opposite almost immediately!] Tech has been a drag and Cisco Systems Inc. (CSCO) earnings and guidance were positive enough to lift the sector today.

Getting away from tech, iShares Russell 2000 Index ETF (IWM) and MidCap SPDRs ETF (MDY) continue to impress.

Then there are the usual suspects overseas.

That’s a fair sampling of the going’s on around the globe wouldn’t you say? What stands-out is the continuing ramp higher in overseas markets combined with the less observed/reported strength in U.S. Mid and Small-Caps.

The ECB will speak tomorrow if I’m not mistaken and may take some stronger steps in preparation for the weekend G-7 meeting. Let’s see what happens.

Have a pleasant evening.

Disclaimer: Among other issues, the ETF Digest maintains positions in: streetTRACKS Gold Trust ETF (GLD), iShares Goldman Sachs Technology Index Fund (IGM), Rydex S&P Equal Weight Tech (RYT), iShares Goldman Sachs Network Index Fund (IGN), iShares NASDAQ Biotechnology Index ETF (IBB), First Trust DJ Internet Index ETF (FDN), iShares Russell 2000 Index ETF (IWM), Ultra Russell 2000 ProShares (UWM), MidCap SPDRs ETF (MDY), ProShares Ultra MidCap400 (MVV), PowerShares Zacks Small Cap Portfolio (PZJ), PowerShares Zacks Microcap Index (PZI), PowerShares Aerospace & Defense (PPA), PowerShares Water Resources ETF (PHO), iShares MSCI Emerging Markets ETF (EEM), PowerShares DB Base Metals Fund (DBB), iShares MSCI EAFE Index Fund ETF (EFA), iShares MSCI Australia Index Fund (EWA), iShares MSCI Mexico Index ETF (EWW), iShares MSCI Australia Index Fund (EWA), iShares MSCI Japan Index ETF (EWJ), Nikkei 225, iPath MSCI India ETN (INP) and iShares MSCI Malaysia (EWM).