US INTEREST RATES

 bp range bounded by October’s 9-1/4 month low of 3.10% and December’s 8-3/4 month high of 3.91%. Bullish factors for T-note prices include (1) slack wage pressures after Q4 unit labor costs were revised down to -5.9% q/q from a previously reported -4.4% q/q, which led total US labor costs to decline -1.7% for 2009, the biggest drop since records began in 1947, and (2) comments from Kansas City Fed President Hoenig who said that selling assets this year by the Fed would be “difficult” and he doesn’t expect it to happen this year, which is bullish in that it reduces concern that the Fed will flood the market with debt securities as it shrinks its balance sheet. Bearish factors include (1) the larger-than-expected increase in the Feb ISM non-manufacturing index which expanded at its fastest pace in 2-1/3 years (+2.5 to 53.0 versus expectations of +0.5 to 51.0), and (2) the larger-than-expected decline in weekly continuing unemployment claims which fell to their lowest level in 14 months (-134,000 to 4.500 million versus expectations of -17,000 to 4.600 million).

FOMC expectations—Market expectations for Fed policy over the past week were unchanged for a tightening of monetary policy starting in Q1 of next year. The market still expects a slow rise in the funds rate to 0.50% by Jan 2011, to 1.00% by May 2011, and to 2.00% by the end of Q1 2012.

US STOCK INDEXES

The S&P 500 index rose to a 1-1/2 month high, but remains near the middle of a range bounded by last month’s 4-month low and January’s 17-month high. That 17-month high was a 53% correction of the 2-year plunge from the record high in Oct 2007 to last March’s 13-year low. Bullish factors include (1) the upward revision in Q4 US productivity (+6.9% q/q from +6.2% q/q), as companies squeezed more out of remaining workers to boost earnings, (2) the Fed's Beige book that stated the US economy improved in 9 of the 12 regional Fed bank districts, and (3) comments from Atlanta Fed President Lockhart who reiterated his support for the Fed to keep interest rates near zero for an "extended period," saying that the economic recovery will likely be modest and inflation will remain subdued. Bearish factors include (1) comments from Dallas Fed President Fisher who said that the US unemployment rate may rise back above 10% as workers return to the labor force, and (2) the smaller-than-expected rise in Jan US personal income (+0.1% versus expectations of +0.4%), which raises concerns about the sustainability of consumer spending.

Earnings expectations for the S&P 500 are as follows, according to Thomson Financial: Q4-2009 (+212.7%), Q1-2010 (+37.1%), Q2-2010 (+22.4%), Q3-2010 (+22.9%), Q4-2010 (+25.8%). S&P 500 annual earnings are expected at -5.4% in 2009 and +26.3% in 2010 (2008 -23.9%, 2007 -3.7%, 2006 +16.1%, 2005 +13.7%, 2004 +20.2%, 2003 +18.4%, vs 25-year average of +8.6%). The S&P 500 forward P/E (based on forward-looking earnings) is at 14.3, modestly below the 5-year average of 15.3.

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