On Wednesday, the FED announced a
continuation of its tactic (often referred to as “Operation Twist” by the news
media) whose goal is to stimulate the economy through lower interest
rates.  The stock and bond market’s reaction was terrible.  I suspect
the FED is losing its ability to stimulate the economy through lower interest
rates.  Why?  Interest rates have fallen so low that lowering them
more does not create sufficient incremental benefit.  For example, home
mortgage rates are generally based upon the 10 year maturity U.S. government
bond which currently yields about 1.6% down from 7.3% 20 years ago.  How
much lower can the 10 year U.S. Treasury drop?  And, how many potential
home buyers would receive enough incentive to make a difference to buy vs not
buy a house if the rate on the home mortgage were 3.10% instead of 3.25%? 
I think the markets are realizing the FED’s ability to stimulate has vastly
diminished.  It’s up to Congress and the White House to lead or get out of
the way.  

Stock
prices finished mixed last week, with small issues outperforming large-caps,
which dropped about 1%. That, and a 2.2% drubbing Thursday—the market’s
second-worst one-day decline this year—likely made things seem worse than the
numbers suggest.

A
mini-recovery Friday helped take the edge off what might have been a nastier
week, though troubled sentiment continues to cast a pall.

The
selloff’s proximate cause was disappointment in the Federal Reserve’s extension
to the end of 2012 of its so-called Operation Twist monetary stimulus. Some
expected more aggressive action. In the Twist, the central bank buys
longer-dated Treasuries and sells short-term bills to try to push down
long-term rates.

More generally, however, worries about a
global economic slowdown and Armageddon-level fears about European sovereign
debt hang like double anchors on equity prices. The HSBC China-manufacturing
purchasing managers’ index, reported last week, fell to 48.1 in June from 48.4
in May; a euro-zone purchasing managers’ index was flat at 46. PMIs above 50
typically indicate expansionary activity.

The
Dow Jones Industrial Average fell 126.39 points, or 0.99%, to 12,640.78 last
week, and the Standard & Poor’s 500 index lost 7.82 points, ending at 1335.02.
Meanwhile, the tech-heavy Nasdaq Composite gained almost 20 points, or 0.68%,
to 2892.42, and the Russell 2000 small-cap index added 3.84 points, or 0.50%,
to 775.16.

Stocks were probably overbought going
into the Fed meeting. “Too high” expectations for a stronger move by
the Fed were baked in by Wednesday’s Federal Open Market session, and when they
weren’t met, the market sold off, says Michael Mullaney, chief investment
officer at Fiduciary Trust. Mullaney looks for choppy and volatile action with
a downward bias the rest of the summer. The worldwide news being what it is,
it’s hard to get excited about stocks, he adds.

This
week could see a news crescendo before the summer doldrums start. The European
Union summit is scheduled for June 28-29, and the U.S. Supreme Court is
expected to rule on Obamacare, which could affect health-care stocks.

“It could be a make-or-break week
for the euro,” says Bill Jenkins, chief investment officer at Mainstream
Investment Advisers. There’s going to be tremendous pressure on EU officials
“to step up….They know they will not be able to refinance their paper
[later this year} unless they do something now.” (Source:  Barrons Online).

Below is a succinct list of last week’s
events:

Positives:

1)
Athens stock market rallies almost 14% on week on hopes New Democracy party
squeezes out win.
2) Unconfirmed story but likely central banks stand ready for coordinated
action to deal with potential bank runs depending on election outcome.
3) Historically low mortgage rates finally entice many as refinance apps jump
19.2% to most since April ’09 and purchase apps rise 1.28% to 6 month high.
4) Headline US Consumer Price Index slows to 1.7% year over year, slowest since
Jan ’11 and Producer Price Index up just .7% year over year due mostly to drop
in energy prices.
5) Consumer Price Index and Producer Price Index in China moderate further,
loan growth, exports and imports gain more than expected.
6) April machinery orders in Japan rise more than forecasted.

Negatives:

1)
Spanish bond yields spike on heels of 100billion euro of extra borrowing to
finance bank bailout. Italian yields also get dragged up.
2) US retail sales in May soft as drop in gasoline prices offset by iffy labor
market and modest income growth.
3) Initial Jobless Claims total 386k, 11k more than expected and the 9th week
in a row above 370k.
4) University of Michigan confidence in June falls to lowest of the yr as both
current conditions and the outlook fall.
5) Industrial Production unexpectedly falls .1% month over month.
6) June NY manufacturing survey falls 14.8 pts to weakest since Nov ’11..
7) Core Consumer Price Index growth remains sticky at 2.3% year over year,
matching the fastest pace since Sept ’08, Producer Price Index core up 2.7%
year over year.
8) Chinese retail sales and Industrial Production grow less than expected in
May.
9) India’s wholesale inflation up 7.55% year over year, more than estimated
ahead of its central bank’s rate meeting Monday. Industrial Production up just
.1%. Will slowest growth in 10 yrs offset still high inflation?

Source: 
The Big Picture