Stock Market Hit Hard

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Japan’s stock market took another huge hit last night taking the Nikkei index down 6.0% and now trading in bearish territory. The reaction sent the US stock indexes down and dropped the 10 yr note yield to 2.18%. Europe’s stock markets also were it hard on the Japanese selling. US economic data at 8:30 stopped the global slide in stock markets although Europe is still weaker; US stock indexes at 9:00 were pointing to an unchanged opening and the improvement in the bond market lost much of its gains. Weekly jobless claims were down 12K to 334K, estimates were for claims to have increased 4K to 350K. May retail sales were expected up 0.5%, sales increased 0.6%; excluding autos sales were expected +0.4%, sales increased 0.3%. Also at 8:30 May export prices declined 0.5%, import prices were down 0.6%, both were expected to be up a little. Global stocks fell, sending the benchmark index to a seven-week low, and the yen strengthened after the World Bank cut its growth forecast. U.S. equity-index futures stayed lower after a report showed retail sales rose more than forecast in May. According to the World Bank the global economy will grow 2.2% in 2013, in Jan the Bank forecast growth at 2.4%. More than $2.5 trillion has been erased from the value of global equities since Fed Chairman Ben S. Bernanke said May 22 the central bank could scale back stimulus efforts should the job market show “sustainable improvement.” At 9:30 the DJIA opened -2 after trading down as much as -50 prior to 8:30, NASDAQ -2, S&P -1. The 10 yr at 2.21% -2 bp and 30 yr MBSs +13 bps. It took just three minutes for the DJIA to drop 38 points frm yesterday’s close. At 1:00 Treasury will auction $13B of 30 yr bonds, yesterday the 10 yr auction didn’t see strong demand. So far this morning the stock market continues its downward path; for the first time since last Dec the US stock market has declined three consecutive days. Expect continued volatility today in the stock and bond market. May retail sales better than thought, weekly claims down to 334K and falling import prices down; good data for the economy particularly in the face of the serious selling in Japan’s markets and continued weakness in Europe’s economies all favor the US markets. US treasuries, German bunds and Japanese JGBs all are better this morning after the World Bank cut its forecast for global growth. Investors are still not running to treasuries in any great quantity but also are not selling as much now as we have experienced since the beginning of May. Already today increased volatility in the bond market. Prior to the better retail sales and weekly claims the 10 yr at one point down 6 bps frm yesterday to 2.17% on the Japan stock market decline. Forecasts of softer global growth may support the US bond market but unless the US stock market is perceived to entering a major correction it is unlikely interest rates will decline much frm present levels. Markets believe the Fed is about to begin tapering its QE, that may be seen as either good news for stocks or bad news; good if future economic data improves, bad if data is soft. Next Tuesday and Wednesday the FOMC will meet, markets looking for some clarity frm the group on what Bernanke has in mind. The bond and mortgage market remain technically and fundamentally bearish. We have hung in on floating but so far no improvement and not much decline in prices. Unless there is improvement in the next day or so we will abandon the float suggestion.