Market Update

Futures are looking down this morning as San Francisco Fed President, Janet Yellen, warned that excessively easy monetary policy could create bubbles in the future. "It is conceivable that accomodative monetary policy could provide tinder for a buildup of leverage and excessive risk-taking." Since the Fed has been involved in nearly every US bubble, it is probably a bit more concrete than it is merely 'conceivable' but I'm glad to see someone on the FOMC express concern.

Also weighing on the markets this morning is India's August industrial production miss that came in at 5.6% (a 15 month low.) The number is very volatile due to the lumpy nature of capital goods orders, but certainly a 5.6% print vs. expectations of 10%+ is something to keep an eye on.

China's auto sales slowed in September as tax breaks and subsidies began to roll off. Sales rose 17 percent YoY to 1.56M, down a bit from 18% in August. But July was 16% growth, and June was 21% growth so while the auto industry in China is being described as normalizing, it must be pointed out that a.) they are still selling more cars than we are domestically in the U.S. and b.) the absolute growth in China continues to be tremendous with sales of 13.6M vehicles in 2009 (45% growth) and on pace to do about 17M vehicles in 2010 (30% growth.) Of note, Ford saw sales in China rise 26%, up from 24% in August. Ford sales in China were up 40% in the first nine months of the year at 419,073 units. GM on the contrary rose 15%, down from 19% growth in August. For the first 9 months of the year, GM sold a record 1.78M vehicles.

Goldman Sachs reports that it has heard from bank employees in China who say that the government has told its largest banks that they must increase reserves to 17.5% (up 50 bps) in order to cool inflation and housing prices. There has been no formal announcement from the government in Beijing. Estimates suggest that this latest reserve hike would remove approx 200B yuan or $29B out of the lending pool. Banks will be allowed to lend a total of 7.5T yuan ($1.1T) this year vs. 9.6T yuan ($1.4T) in 2009.

Despite all the bad economic news this morning (summarizing...signs of slowing growth in China and India, INTC reporting after the close today after negatively pre-announcing a few weeks ago, Fed warning that QE2 expectations for November may be a bit premature, etc) there is nothing that will change the fact that until investors are disappointed by either earnings or the Fed fails to announce QE2 on November 3rd, the market will hold its level. That being said, I do expect earnings to be somewhat disappointing especially for the banks and brokers. We have JPM reporting earnings on Thursday. With a bad print possible, I wonder that when the Fed releases its POMO schedule for the coming weeks on Wednesday, if it doesn't include a healthy dose of Thursday and Friday this week???

FOMC minutes are due out at 11 am PST.