While stocks drift higher, the action this week has been in bonds and commodities.
Wednesday could see some of the same dynamic as traders watch for news on government stimulus plans and await the Friday jobs report. Meanwhile, the Fed has been revving up the mortgage market, pushing down rates as it buys up paper.
At the same time, the turn of the year has brought buyers back into the markets. The corporate bond market is benefiting from a wave of new issuance. For instance, GE Capital's billion dollar 30-year offer Tuesday was oversubscribed, and its Monday offer of a $10 billion FDIC guaranteed issue was well received. The secondary market for corporate bonds is benefiting from the new issuance, and spreads are narrowing.
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"You've seen some real good demand. It's probably the first step to get the credit markets moving again. In corporate and even in high yield issues, you're seeing some real mutual fund buying in that space and spreads are tightening. This is something stocks have been expecting to happen," said Robert Harrington, head of UBS equities trading desk.
"We're not going to be out of the woods yet, but I think there's enough positive things happening in the short term where stocks will win the tug of war to the upside for a bit," he said. "While you have this stimulus package being worked on, and it's viewed positively, as well as what I'm seeing in the credit markets, it might give people some more encouragement that we put in the lows in November."
The Dow Tuesday was up 62 points, or 0.69 percent at 9015. The S&P 500 rose 7 or 0.78 percent points to 934, while Nasdaq climbed 1.5 percent to 1652. the Russell 2000 was up 9.68 points or 1.9 percent at 514.
On Wednesday, ADP's private employment report is released at 8:15 a.m. It is viewed as a preview to the government jobs report, but it is not considered an accurate indicator.
The key events though are happening in Washington. President-elect Barack Obama holds a press conference at 10:15 a.m., and he also speaks with CNBC's John Harwood in an exclusive interview during the afternoon.
The markets have been responding fairly well to talk of the giant stimulus package which has been a focus of meetings in Washington between the incoming Obama Administration and Congressional leadership this week. But the stimulus has a double edge to it. The idea it will help the economy is a positive in the stock and currency markets. But the concern that it will be too huge a program, resulting in a flood of new U.S. debt and a giant deficit, has been felt in the long end of the Treasury market.
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Commodities, meanwhile, have found some traction on the idea the plan will be inflationary. From copper to cotton, they are also moving higher as funds reshuffle holdings ahead of expected index rebalancing. Illustrating just how complicated the cross currents are in the financial markets were comments from the Fed Tuesday which said it was concerned about deflation. Those comments were issued with the minutes from its Dec. 15-16 meeting, where it also said the economic outlook will be weak for some time.
"The FOMC minutes were looking at ... no growth at all and that sent the bond market into a tizzy," said Michael Franzese, head of government trading at Standard Chartered. He said the 10-year Treasury recovered its early losses on the afternoon Fed release and returned to levels where it started the day. The yield at one point touched 2.60 but retreated to 2.505 percent by day's end.
"We're back down to a low and we're above 2.50 so that's very positive momentum," he said Tuesday afternoon. Franzese said he expects the volatility in Treasurys to continue Wednesday.
Also in Washington Wednesday, Treasury Secretary Hank Paulson speaks at 12 p.m. to the National Economists Club on the role of government sponsored entities --Fannie Mae and Freddie Mac -- in supporting the housing recovery.
Signs of Hope?
Tony Crescenzi, chief bond market strategist at Miller Tabak, has been keeping a look out for any signs of troughing in the economic downturn. He is watching a range of indicators and said Tuesday he thinks he's spotted two new ones. One that may have hit bottom is steel production, which the American Iron and Steel Institute reports increased last week for the first time in 20 weeks.
Also, despite steep declines, car sales showed signs of perking up in the final weeks of December. Crescenzi said car sales look set to increase in January as a result of government support for the industry. "For example, if car sales increase, industrial production might increase. In addition, regional manufacturing surveys and perhaps the ISM index will improve and durable good orders will improve," he wrote in a note.
Crescenzi said he plans to compile a "trough list" with an eye to identifying the depth of the recession. "The trough idea is important, as risk assets tend to gain with market participants sense a trough has been reached in part because at the trough it is easier to discern the depth and duration of the recession," he wrote.
Crescenzi said in an email that he will be also watching consumer sentiment, due out Tuesday nights. He also said it's clear mortgage applications have bottomed. Chain store sales showed some improvement in he past week, but it is too early to add retailers' sales to the list. Cresscenzi admits his list is brief and that would also suggest it may be too soon for a sustained rally in risk assets.
Crude oil , which rallied early and touched $50, finished Tuesday $0.23 lower at $48.58 per barrel, ending a three-day winning streak. Heating oil led the energy complex, with a 3.2 percent increase to $1.6263 per gallon. Gasoline was up 0.6 percent at $1.1892 per gallon.
M.F. Global senior vice president John Kilduff said Russia's dispute with the Ukraine is behind the rise in heating oil prices. Russia's Gazprom has suspended delivery of gas for use by the Ukraine after the two countries failed to reach an agreement on rates. The shut off has caused shortages in Europe.
"There's going to be a greater call for heating oil globally as a result, because they're going to have to move quickly to use it for generation and heating in Europe," he said. "As luck would have it, there's a cold front moving across the continent."
Several companies report earnings Wednesday, including Constellation Brands, Family Dollar Store and Monsanto, before the bell. Ruby Tuesday, Supervalu and Bed, Bath and Beyond report after the close.
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