"So many things are shaping up to give us a repeat performance. Even today's data. The consumer confidence and housing data showed us a market that was willing to sell on the news. I guess that may be true of the jobs report Friday and some of the earnings news," said Kleintop in mid-afternoon, referring to the market's early softness Tuesday.
Consumer confidence rebounded to 52.5 from January's 46.4, and the S&P/Case-Shiller home price index was down 0.7 percent year over year, slightly better than expected.
Kleintop said the market's expectations for the Friday jobs report may be too great:
"The market seems to be sure we'll get (the estimate) but what if we do and it doesn't surprise to the upside. Maybe there's some risk there," he said.
The stock market is closed for the Good Friday holiday, when the jobs report is scheduled for release.
Kleintop said there are several major risks in the second quarter, including the potential that China could take further steps to cool its economy. Chinese data is expected to be released between April 9 and 11, and the Chinese government could choose that time to announce further restrictions on lending. There is also the April 15 date by which the U.S. Treasury will determine whether to label China a currency manipulator, an idea championed by some members of Congress.
Another potential negative for the market would be the Fed's move toward higher rates, which could come toward the end of the year. "I think we'll actually hit the highs for the year in the second quarter," he said. "...We'll see 11,000 on the Dow and maybe 1250 on the S&P...We could end the year pretty close to where we are now on the S&P."
Kleintop said a selloff could be timed to the earnings reporting season, as it was in the first quarter.
End of Fed Program
The Fed's mortgage purchase program officially concludes Wednesday, and the market is divided on whether the Fed's exit will push mortgage rates higher or not.
John Sprow, chief risk officer at Smith Breeden, said he thinks mortgage rates will ultimately become more volatile. On Tuesday, the spread on mortgages (Fannie OTR) was about 61 bps from Treasurys, close to the multi decade low of 58 bps reached earlier in the month.
"You'll see more volatility in the mortgage spaces...The Fed has been providing a backstop and now it's going away. The back stop prior to the Fed were the GSEs (government-sponsored entities), and I don't think that's happening any time soon. I think we're going back to volatility in the mortgage market," said Sprow.
"There's still banks and money managers and insurance companies who have always been there, but probably for the last 15 years, we had Fannie and Freddie being the backstops. Now it's been the government. But it doesn't mean we're going to hell in a handbasket. The sovereign funds have stepped out of the U.S. market as well," he said. (See: Art Cashin's take on sovereign funds.)
Sprow said he expects to see spreads between mortgages and Treasurys widen.
As for Fannie Mae and Freddie Mac, "I think they'll continue to exist as quasi-government entities with supposedly more oversight than they had before..I don't think we'll see them running the same kind of leverage or running the same kind of huge portfolios they ran before. It's a lot like what I think for the banks. It'll go back to the way things used to be," he said.
Treasurys seesawed Tuesday, with the 10-year ending the day lower. Its yield rose to 3.870 percent. The euro was at $1.3413, late in the day, reversing an earlier move higher to $1.3535.
"Today's story is euro weakness — Greek bonds," said Marc Chandler, chief currency strategist at Brown Brothers Harriman. Spreads on Greek bonds widened Tuesday, as the market determined that Monday's Greek debt issue wasn't as successful as originally thought.
"Part of the problem is indigestion form yesterday's supply, but we also know there's more supply coming. That's the heart of it," said Chandler, noting some investors went long euro, looking for the bounce to last longer. "A lot of late long euros were in weak hands and they bailed out at the first sign of weakness," he said.
Sprow said the Greek situation could mean trouble for markets if it gets worse: "I don't see how the euro system, the way it's designed, can withstand a real problem. There's no system to kick someone out," he said.
"If it all unravels, it will certainly increase risk premiums, but it should increase flows to dollar assets," he said.
Chandler said a factor for Wednesday's foreign exchange market is the year end in Japan. "The idea is their fiscal year is almost over and they've already done their repatriation. The market suspects the yen is going to weaken after the new year," he said.
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