For a second consecutive day, US stocks rose sharply despite lacklustre economic data. From Bloomberg:
U.S. stocks staged the biggest two-day rally in five years, led by financial shares, after Federal Reserve Vice Chairman Donald Kohn buttressed expectations for another interest rate cut...
The Standard & Poor's 500 Index added 40.79, or 2.9 percent, to 1,469.02, bringing its two-day gain to 4.4 percent, the most since October 2002. The Dow Jones Industrial Average increased 331.01, or 2.6 percent, to 13,289.45, its best daily advance since April 2003. The Nasdaq Composite gained 82.11 to 2,662.91. More than 13 stocks rose for every one that fell on the New York Stock Exchange.
European shares also climbed, with the Dow Jones Stoxx 600 gaining 2.8 percent to 364.09, the most since 2003. U.S. Treasury and European government bonds fell as the stock-market gains reduced the appeal of fixed-rate investments.
Mark Hulbert points out that yesterday was a "9-to-1 Up Day", meaning that the volume of NYSE-listed shares that rose in price was more than 90 percent of the total volume of all shares that either rose or fell. This, according to Hulbert -- citing research from Martin Zweig -- "is a significant sign of positive momentum".
While the prospect for rate cuts boosted stock prices, it did not help Treasury note prices. Bloomberg reports:
The yield on the current two-year note rose 10 basis points, or 0.10 percentage point, to 3.18 percent at 4:18 p.m. in New York, according to bond broker Cantor Fitzgerald LP. It touched 2.87 percent on Nov. 26, the lowest since December 2004. Yields have since advanced 29 basis points, the most since increasing 29.5 basis points over two days in May 2004.
Stock prices and Treasury yields rose despite bleak economic data released yesterday. From Bloomberg:
Purchases of existing homes dropped 1.2 percent to an annual rate of 4.97 million, the fewest since the National Association of Realtors began keeping the records in 1999. Orders for items made to last several years fell 0.4 percent, the Commerce Department said today in Washington...
Economic growth slowed from October through mid-November in seven of 12 U.S. regions, the Fed said today in its regional business survey known as the Beige Book. Residential real estate markets "remained quite depressed" with only a few signs of "stabilization amidst the ongoing slowdown."
And it is no longer just residential property that is at risk. Bloomberg reports that commercial property may also be facing problems.
The cost of derivatives protecting investors from defaults on the highest-rated bonds backed by properties more than doubled in the past month, according to Markit Group Ltd. Prices suggest traders anticipate defaults rising to the highest level since the Great Depression, according to analysts at RBS Greenwich Capital in Greenwich, Connecticut.
While the Fed is entertaining hopes for rate cuts, the ECB is unlikely to do the same any time soon. From Bloomberg:
Inflation in the euro area may accelerate to a six-year high of 3 percent this month, increasing pressure on the European Central Bank to raise interest rates, economists said after prices jumped in Germany.
Banks including Barclays Capital and Dekabank today revised up their November inflation forecasts for the euro region to as high as 3 percent after soaring oil and food prices pushed the rate to 3.3 percent in Germany, Europe's largest economy. Before the German figures, economists were forecasting a euro-region rate of 2.7 percent after 2.6 percent in October.
An acceleration in M3 money supply growth in the euro area to 12.3 percent in October, the highest growth rate since July 1979, from 11.3 percent in September would not have helped raise hopes for a rate cut by the ECB.