What
will the Fed do this week?
Stocks
experienced another down week, driven largely by low volume, anticipation of a
budget deal, and investor caution before the Federal Open Market Concerns
(FOMC) meeting. For the week, the S&P 500 lost 1.65%, the Dow fell 1.65%,
and the Nasdaq lost 1.51%.[i]
Several
narratives drove the action last week. The House passed a breakthrough budget
deal that will avoid a government shutdown in January and blunts the next round
of automatic sequestration cuts. The modest deal won’t make much of a dent in
the U.S.
deficit and doesn’t deal with the debt ceiling, meaning that we could see
another battle when it needs to be increased by Congress in early spring. The
bill will go to the Senate next, where it’s expected to pass despite the
objections of some political groups, who would prefer to see government
spending cuts included.[ii]
It appears that investors had two concerns about the bill last week: Though Senate
approval of the bill seems certain, there’s still an opportunity for opponents
to derail the process, pushing the deal into the New Year and raising the risk
of another shutdown. On the other hand, passage of the bill may increase the
possibility of the Fed making a tapering announcement at this week’s meeting.
Last
week’s initial jobless claims spiked unexpectedly to 368,000 (expectations had
ranged from 300,000-315,000); however, the Labor Department said that it is
still experiencing problems with seasonal adjustments, meaning that the report
is not as disappointing as it may appear.[iii]
Another factor in the poor performance last week is that bullish sentiment has
been running so high in recent weeks that a pullback was almost certain. Though
it’s disappointing to see the rally stumble so close to the end of the year,
keep in mind how far we’ve come in 2013: to date, the S&P 500 has gained
24.5%, the Dow has increased 20.2%, and the Nasdaq has grown 32.5%.[iv]
Depending on the outcome of the budget bill debates and the FOMC meeting, it’s
possible that markets could renew the rally, giving investors another bump
before year-end.
The
Fed’s FOMC meeting will be in focus this week as investors wait to see whether
the central bank will send out 2013 with a bang or a whimper. It’s hard to call
the odds on whether the Fed will announce intentions to scale back its
stimulative bond-buying programs now that the economic outlook is brightening,
or if it will wait until next spring. Currently, general sentiment expects the
Fed to delay the taper until next year, but we won’t know for sure until the
official announcement on Wednesday. Investors will also be watching Washington carefully as
the Senate begins debating the budget deal on Tuesday. The final Senate vote on
Janet Yellen for the next Fed chair will also be this week.[v]
ECONOMIC CALENDAR:
Monday: Empire State Mfg. Survey, Productivity and Costs,
PMI Manufacturing Index Flash, Treasury International Capital, Industrial
Production
Tuesday: Consumer Price Index, Housing Market
Index
Wednesday: Housing Starts, EIA Petroleum Status
Report, FOMC Meeting Announcement, FOMC Forecasts, Chairman Press Conference
Thursday: Jobless Claims, Philadelphia Fed Survey, Existing Home Sales
Friday: GDP
.
HEADLINES:
Wholesale price show muted inflation
pressure. Producer
prices fell for the third straight month in November, indicating that inflation
is still weak. Falling gasoline prices caused much of the downward trend, which
will likely factor into the Fed’s tapering decision this week. Persistently low
inflation can contribute to slow economic growth.[vi]
Strong November retail sales boost
economic outlook. U.S. retail
sales data showed solid growth in November, increasing 0.7%, as Americans
stepped up their spending on a wide range of goods. November’s increase was the
largest in five months and could portend a strong holiday shopping season.[vii]
Import price fell in November for
second straight month.
Falling food and petroleum prices led to lower import costs, indicating that
imported inflation is also well below target levels. Soft import inflation also
points to weak demand overseas, which is keeping prices down.[viii]
Auto industry showing strengthening
sales. Solid November
sales data and unexpectedly strong Black Friday performance indicates that
consumers are opening their wallets for new cars. Auto financing data shows
that Americans took out a record number of car loans in the third quarter.[ix]
“Your attitude, not your
aptitude, will determine your altitude.”
- Zig Ziglar
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