How long will the Fed
continue its ‘easy money’ policy?
Stocks entered the holiday
weekend down on worries that the Fed might cut back its quantitative easing.
For the week, the S&P 500 dropped 1.07%, the Dow lost 0.33%, and the Nasdaq
lost 1.14%.[1]
Fed officials went into a
full-court communications press as markets wobbled on fears the Fed might begin
shuttering its bond-buying program. To counter these worries, Fed officials
stressed that there is no rush to exit and that the program is not on
“autopilot;” rather, bond purchases will be scaled up or down as future
conditions warrant. In a speech before the Joint Economic Committee, Fed
Chairman Ben Bernanke warned that premature tapering could stall the recovery
and reiterated that any tightening of monetary policy would be cautious and
considered.[2]
While it’s good news that the Fed isn’t rushing for the exits, we can expect
additional volatility in the coming months as markets prepare for the end of
easy Fed money.
While markets reacted poorly
to the Fed’s news, economic data last week was generally positive. The number
of Americans applying for unemployment benefits fell last week, pointing to
continued resilience in the jobs market despite the effects of sequestration.
The improving employment picture is also propping up the housing market and
consumer sentiment, with rising home prices supporting consumption and keeping
Americans upbeat. The drop in unemployment claims erased most of the previous
weeks’ increase and indicates that employers are not laying off workers despite
the fiscal austerity.[3]
Markets will be very focused
on the economy this week, as a number of important economic reports are due to
be released, including: consumer confidence, revised Q1 GDP, housing reports,
and weekly jobless claims. The Thursday jobs report, the last one before the
June 7th release of the May jobs report, will be closely watched as
traders look for clues about final May numbers. The May report is the next
major milestone for the Fed since it has targeted a 6.5% unemployment rate as
part of its mandate. If there is significant improvement over the 165,000 new
jobs created in April, we can expect the Fed to look for confirmation over the
next few months and begin to talk more seriously about tapering the bond
program.[4]
ECONOMIC CALENDAR:
Monday: U.S. Markets Closed for Memorial Day Holiday
Tuesday: S&P 500 Case-Shiller HPI, Consumer
Confidence, Dallas
Fed Mfg. Survey
Thursday: GDP, Jobless Claims, Pending Home
Sales Index, EIA Petroleum Status Report
Friday: Personal Income and Outlays, Chicago PMI, Consumer
Sentiment
Notes: All index returns exclude reinvested dividends, and the 5-year and
10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov.
International performance is represented
by the MSCI EAFE Index. Past performance is no guarantee of future
results. Indices are unmanaged and cannot be invested into directly.
HEADLINES:
Durable goods orders rise. A surprisingly high increase in
orders for long-lasting factory goods suggests that a manufacturing slowdown
may be ending. New orders for factory goods rose 3.3% in April, roundly beating
estimates of a 1.5% increase.[5]
Public schools spent less per student in 2011. In a sign that the Great Recession
has reached public school budgets, a Census report shows that the amount per
student spent by schools fell in 2011 for the first time in more than 30 years.
Overall, nationwide school spending dropped less than one percent per student,
but the number reflects greater declines in certain geographic areas.[6]
China’s
factory activity shrinks in May.
Chinese factory production fell for the first time in seven months, indicating
that its economic recovery may have stalled and another recession may be
imminent. Since China
is largely a manufacturing-based economy, policy makers must decide whether to
act now to boost growth or risk a cool-off while laying groundwork for long-term
economic activity.[7]
Oil prices drop on weak economic outlook. Brent crude dropped close to $102 per
barrel after disappointing economic data from China
and high oil supplies in the U.S.
forecasted softer demand. Weaker demand and ample gasoline stockpiles in the U.S.
might mean lower oil prices this summer.[8]
“Be
grateful to all of those people who told you ‘no’.It’s because of them you
managed to do it all yourself’.” – Dr. Wayne Dyer
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[1] http://briefing.com/investor/markets/weekly-wrap/weekly-wrap-for-may-20-2013.htm
[2] http://www.reuters.com/article/2013/05/23/us-fed-bullard-idUSBRE94M0GO20130523
[3] http://www.reuters.com/article/2013/05/24/us-usa-economy-idUSBRE94M0K220130524
[4] http://www.cnbc.com/id/100764914
[5] http://www.reuters.com/article/2013/05/25/us-durable-goods-idUSBRE94N0FR20130525
[6] http://www.cnbc.com/id/100765235
[7] http://www.reuters.com/article/2013/05/23/us-china-economy-flash-pmi-idUSBRE94M02720130523
[8] http://news.yahoo.com/brent-drops-towards-102-weak-demand-outlook-hurts-081811016.html
