Monthly Archives: March 2014

Market Insights 3/28/2014

Stocks Close Week on Up Note

The U.S. equity markets closed the trading session higher to end the week, but well off the best levels of the day as investors weighed domestic reports that showed personal income and personal spending rose inline with expectations. Plus, consumer sentiment was revised slightly higher, but came in below most street estimates. Treasuries were mostly lower following the economic data. Crude oil prices and gold were higher, while the U.S. dollar was nearly unchanged.

The Dow Jones Industrial Average increased 59 points (0.4%) to 16,323

The S&P 500 Index gained 9 points (0.5%) to 1,858

The Nasdaq Composite was 5 points (0.1%) higher at 4,156

In moderate volume, 639 million shares were traded on the NYSE, and 2.0 billion shares changed hands on the Nasdaq

WTI crude oil increased $0.39 to $101.67 per barrel, wholesale gasoline was unchanged at $2.94 per gallon

The Bloomberg gold spot price increased $1.33 to $1,292.64 per ounce

Markets were mixed on the week, as the DJIA increased 0.1%, the S&P 500 Index decreased 0.5%, and the Nasdaq Composite Index dropped 2.8%

Consumer sentiment revised slightly higher, while personal spending meets forecasts

The final University of Michigan Consumer Sentiment Index was revised slightly higher to 80.0 for March, from the preliminary report of 79.9, and compared to the 80.5 revision that economists surveyed by Bloomberg had estimated. February’s figure was 81.6 and this month’s level was the lowest since November. The smaller-than-expected upward revision came as a modest improvement for the economic outlook component of the survey was accompanied by a decline in the economic conditions portion.

On inflation, the 1-year expectation remained at 3.2%, matching February’s figure, while the 5-year inflation outlook was also unadjusted at 2.9%, inline with the expectation in the previous month

Personal income rose 0.3% month-over-month in February, matching the gain that economists surveyed by Bloomberg had projected, and January’s 0.3% rise was unrevised. Personal spending increased 0.3% m/m in February, inline with expectations, while January’s 0.4% gain was revised to a 0.2% increase. The February savings rate as a percentage of disposable income ticked higher to 4.3%, from January’s downwardly revised 4.2% rate.

Pent up demand is one aspect of the severe weather that seems to be at least slightly overlooked by most traders and investors. Of course, not all purchases that were put off will be made up for, but many believe that a great majority of them will be. This may potentially help GDP in the 2nd quarter of 2014. Plus, a relatively small but perhaps important development we believe we’ll see as the weather thaws is stronger-than-expected demand for “warm weather” related products and services as much of the country ventures outside for the first time in 6 months. The disgust factor with the tough winter seems to be quite high, and we believe there’s a decent chance that consumers will be looking for things to move quickly away from the memories of seemingly unending snow and cold. This can only continue to bolster local economies.

Treasuries were mostly lower, with the yield on the 2-year note nearly unchanged at 0.45%, while the yield on the 10-year note rose 4 basis points (bps) to 2.72% and the 30-year bond rate increased 2 bps to 3.55%.

Europe and Asia

The European equity markets finished higher, with sentiment being supported by growing optimism that China may deliver more stimulus measures to meet its 7.5% economic growth target. Meanwhile, the festering Ukrainian tensions with Russia garnered some attention ahead of the weekend. The European economic calendar delivered some mixed data, with Spain’s retail sales declining last month and French consumer spending unexpectedly decreasing in February, while U.K. 4Q GDP was unrevised at a 0.7% quarter-over-quarter pace of expansion and Eurozone economic confidence improved more than anticipated for March.

Stocks in Asia finished mostly higher, aided by increased optimism that the Chinese government will deploy further stimulus measures after a media report said China’s Premier Li was confident of keeping economic growth in a “reasonable range,” per Bloomberg. China has stood by its 7.5% economic growth target, despite recent data showing economic growth is slowing. Japan released reports that showed the nation’s consumer prices rose in February and retail sales for last month unexpectedly increased, more than offsetting a separate release showing household spending surprisingly fell for the month. Lastly, South Korea revealed a disappointing report on the nation’s industrial output for February.

Market Insights 3/27/2014

Stocks in Slump for Second-Straight Session

The U.S. equity markets closed the trading session lower in the wake of some domestic data and as the Central Bank objected to the capital plans of several companies in the banking sector. In economic news, the final read on 4Q GDP growth slightly missed expectations and pending home sales unexpectedly declined, while weekly jobless claims surprisingly fell and regional manufacturing activity accelerated more than anticipated. Treasuries were mostly higher following the reports. Gold was lower and the U.S. dollar was higher, while crude oil prices were mixed.

The Dow Jones Industrial Average (DJIA) decreased 5 points to 16,264

The S&P 500 Index moved 4 points (0.2%) lower to 1,849

The Nasdaq Composite declined 22 points (0.5%) to 4,151

In moderate volume, 788 million shares were traded on the NYSE, and 2.2 billion shares changed hands on the Nasdaq

WTI crude oil increased $1.02 to $101.28 per barrel and wholesale gasoline gained $0.03 to $2.94 per gallon

The Bloomberg gold spot price fell $11.74 to $1,292.75 per ounce

Jobless claims surprisingly fall, while final read on 4Q GDP missed expectations

Weekly initial jobless claims fell by 10,000 to 311,000 last week, below the 323,000 level that economists surveyed by Bloomberg had expected, as the prior week’s figure was upwardly revised by 1,000 to 321,000. The four-week moving average, considered a smoother look at the trend in claims, dropped by 9,500 to 317,750, while continuing claims fell by 53,000 to 2,823,000, south of the forecast of economists, which called for a level of 2,882,000.

Meanwhile, the third and final look at 4Q Gross Domestic Product, the broadest measure of economic output, showed the previously revised quarter-over-quarter annualized 2.4% pace of expansion was adjusted to a 2.6% growth rate. Economists had expected an upward revision to a 2.7% rate of expansion, and the pace of growth was down from the 4.1% increase posted in 3Q. However, personal consumption was revised higher than projected from the second reading of a 2.6% increase to a 3.3% rise, versus the 2.7% gain that was anticipated, and following the 2.0% increase recorded in 3Q.

On inflation, the GDP Price Index was unrevised at a rise of 1.6%, matching economists’ expectations, while the core PCE Index, which excludes food and energy, was unadjusted at a 1.3% increase, inline with economists’ forecasts.

In housing news, pending home sales declined 0.8% month-over-month in February, compared to the projected 0.2% increase, and following the negatively revised 0.2% decrease registered in January. Year-over-year, sales were down 10.2% last month, versus the forecasted 9.0% decline, and January’s unfavorably revised 9.3% decrease. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which decreased inline with expectations for February.

Finally, the Kansas City Fed Manufacturing Activity Index showed growth in the sector accelerated more than expected in March, increasing to 10 from 4 in February, and compared to the increase to 5 that was expected, with a reading above zero depicting expansion.

Treasuries were mostly higher following the data, with the yield on the 2-year note nearly unchanged at 0.44%, while the yield on the 10-year note declined 2 bps to 2.67% and the 30-year bond rate dropped 3 bps to 3.52%.

Tomorrow’s domestic economic calendar will offer readings on personal income, anticipated to increase 0.3% m/m in February, and personal spending, expected to also have grown 0.3% m/m. As well, the final University of Michigan Consumer Sentiment Index for March will be released, with a reading of 80.5 expected, an increase from the preliminary report level of 79.9.

Europe and Asia mixed

The European equity markets finished mixed, with banking sector stocks applying some pressure in the wake of the U.S. Federal Reserve’s objection to capital plans of units from HSBC, RBS, and Santander. Moreover, sentiment was stymied by yesterday’s flare-up in geopolitical concerns as the U.S. and European Union suggested it may deploy more sanctions on Russia if it takes further actions to break-up Ukraine. Meanwhile, the retail sector was in focus following a stronger-than-expected read on U.K. February retail sales. In other economic news, French consumer confidence unexpectedly improved, while Italian business confidence increased by a smaller amount than anticipated.

Stocks in Asia finished mixed following yesterday’s flare-up in geopolitical concerns that caused a late-day slide for the U.S. markets. Chinese stocks saw some pressure amid lingering uneasiness toward the world’s second-largest economy as reports showed the country’s industrial profit growth slowed and money market rates rose. Japanese equities reversed to the upside in late-day action amid some weakness in the yen, and stocks in India hit another record high. Meanwhile, a report from South Korea showed the nation’s retail sales fell.

Market Insights 3/26/2014

Equities Lower as Focus Returns to Ukraine Situation

The U.S. equity markets closed the trading session lower as stocks reversed course in the wake of comments made by President Obama in regards to the ongoing situation between Russia and Ukraine. The day began with positive momentum spilling over from yesterday’s six-year high U.S. consumer confidence reading, but equities were unable to hold gains as the economic calendar showed a lackluster durable goods report and a decline in home mortgage applications.

The Dow Jones Industrial Average decreased 99 points (0.6%) to 16,269

The S&P 500 Index moved 13 points (0.7%) lower to 1,853

The Nasdaq Composite declined 61 points (1.4%) to 4,174

In moderate volume, 752 million shares were traded on the NYSE, and 2.4 billion shares changed hands on the Nasdaq

WTI crude oil increased $1.07 to $100.26 per barrel and wholesale gasoline gained $0.03 to $2.91 per gallon

The Bloomberg gold spot price fell $8.69 to $1,301.81 per ounce

Durable goods mostly below forecasts, while mortgage applications declined

Durable goods orders rose 2.2% month-over-month in February, compared to the 0.8% increase expected by economists surveyed by Bloomberg, while January’s 1.0% drop was revised to a 1.3% fall. However, ex-transportation, orders rose 0.2% m/m in February, versus the forecast of a 0.3% increase, and January’s figure was revised lower to a 0.9% gain from an initial rise of 1.1%. Disappointingly, orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, fell 1.3% m/m last month, compared to the 0.5% increase that was projected, after rising by 0.8% in January, revised down from the initial 1.7% gain.

The MBA Mortgage Application Index declined 3.5% last week, after the index rose an upwardly revised 0.2% in the previous week. The decrease came as a 7.7% drop for the Refinance Index more than offset a 2.8% increase for the Purchase Index. Moreover, the average 30-year mortgage rate rose 6 basis points to 4.56%.

Treasuries were higher following the data, with the yield on the 2-year note dipping 3 bps to 0.44%, the yield on the 10-year note decreasing 6 bps to 2.69%, and the 30-year bond rate dropping 5 bps to 3.54%

Tomorrow, the U.S. economic calendar will give traders their third and final read on 4Q Gross Domestic Product, forecasted to show a quarter-over-quarter (q/q) annualized growth rate of 2.7%, up from the 2.4% q/q annualized rate of expansion reported in the second revision, while personal consumption is expected to have risen 2.7% q/q following the 2.0% increase seen in the 3Q, and the GDP Price Index and the core PCE index are expected to show gains of 1.6% and 1.3%, respectively.

Europe gains and Asia mostly higher

The European equity markets finished higher as a European Central Bank (ECB) official’s comments fostered some optimism that further stimulus may be an option. ECB Governing Council member and Bundesbank President Weidmann noted yesterday that further stimulus measures were not “out of the question.” In economic news, German consumer confidence held steady for April, as expected, while Italian retail sales came in flat m/m in January, compared to the 0.1% gain that was expected.

Stocks in Asia finished mostly to the upside on the heels of yesterday’s jump in U.S. consumer confidence to a six-year high. Reserve Bank of Australia Governor Stevens offered an upbeat commentary on the Australian economy, highlighting increased signs of domestic consumption. Meanwhile, South Korea reported a downwardly revised 3.7% year-over-year pace of 4Q GDP growth. Chinese stocks finished mixed, as lingering economic growth and financial system worries hampered sentiment.

Market Insights 3/25/2014

Markets Post Gains as Consumer Confidence Soars

On the heels of yesterday’s declines, the U.S. equity markets were able to bounce back and close the trading session higher as a report showed that consumer confidence soared to a six-year high. Other domestic data, new home sales came in below expectations, while home prices gained ground and regional manufacturing activity unexpectedly fell deeper into contraction territory. Treasuries were mixed following the economic developments.

The Dow Jones Industrial Average (DJIA) increased 91 points (0.6%) to 16,368

The S&P 500 Index moved 8 points (0.4%) higher to 1,866

The Nasdaq Composite added 8 points (0.2%) to 4,234

In moderate volume, 645 million shares were traded on the NYSE, and 2.3 billion shares changed hands on the Nasdaq

WTI crude oil decreased $0.41 to $99.19 per barrel and wholesale gasoline decreased $0.01 to $2.88 per gallon

The Bloomberg gold spot price gained $3.05 to $1,311.81 per ounce

Consumer Confidence jumps

The Consumer Confidence Index jumped from an upwardly revised 78.3 in February to 82.3 for March, topping the 78.5 reading that economists surveyed by Bloomberg had anticipated. This was highest reading since January 2008, as a solid improvement in the component pertaining to expectations of business conditions more than offset a decline in the portion related to current situation. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—deteriorated to -19.9 from -19.0 last month.

New home sales fell 3.3% month-over-month in February, to an annual rate of 440,000 units, from January’s downwardly revised 455,000 unit pace. Economists had expected a decline to a 445,000 rate for last month. Within the report, the median home price was down 1.2% y/y but 0.4% higher m/m at $261,800. The inventory of new homes was 24.3% higher y/y, and 0.5% above last month’s figure, at 189,000 units. This represents 5.2 months of supply at the current sales rate, from 5.0 months in January and 4.1 in February 2013. New home sales are considered a timely indicator of conditions in the housing market as they are based on contract signings instead of closings.

Treasuries were mixed, with the yield on the 2-year note dipping 1 basis point to 0.43%, while the yield on the 10-year note increased 2 bps to 2.74% and the 30-year bond rate advanced 3 bps to 3.59%

Tomorrow, the U.S. economic calendar will yield the release of durable goods orders, a gauge of demand for goods meant to last at least three years. The headline figure, which can be volatile, is forecasted to increase 0.8% m/m in February, after falling 1.0% in January. Meanwhile, excluding transportation, orders are projected to rise 0.3%, following the previous month’s 1.1% increase. Finally, orders for nondefense capital goods excluding aircraft—a read on business investment—are anticipated to gain 0.5% on the heels of the 1.7% gain posted in the previous month.

Europe rebounds, Asia mixed

The European equity markets rebounded from yesterday’s losses that came on festering Ukraine tensions as well as Chinese growth concerns. Meanwhile, traders sifted through a read on German business sentiment for March, with the Ifo survey of 7,000 executives showing the business climate component declining for the first time since October, while the current assessment improved more than anticipated. In other economic news, U.K. consumer prices rose inline with expectations for February, while French business confidence improved in March. Finally, geopolitical concerns remained as Russia likely faces further sanctions as a result of its annexation of Crimea from Ukraine.

Stocks in Asia finished mixed as geopolitical concerns continued to hamstring conviction, while traders grappled with whether the Chinese government will deploy further stimulus measures in order to reach its 7.5% economic growth target. Yesterday, a read on China’s manufacturing output unexpectedly deteriorated, adding to recent data suggesting a slowing of the world’s second-largest economy. We are expecting China’s growth to slow further in coming months, but believe a lot of bad news is already reflected in stock prices. i.e., the worst fears may be overblown.

Market Insights 3/24/2014

Markets Lower as Nasdaq Slips

The U.S. equity markets began the week lower, as sentiment may have been hindered by a disappointing manufacturing activity read from China and continued geopolitical concerns. The Nasdaq lagged disproportionately, as pricing worries in the biotech sector seemed to weigh heavily on the virtual exchange. Treasuries were mixed with the domestic economic docket showing that manufacturing grew slower than forecasted.

The Dow Jones Industrial Average (DJIA) declined 26 points (0.2%) to 16,277

The S&P 500 Index moved 9 points (0.5%) lower to 1,857

The Nasdaq Composite lost 50 points (1.2%) to 4,226

In moderately-heavy volume, 728 million shares were traded on the NYSE, and 2.4 billion shares changed hands on the Nasdaq

WTI crude oil increased $0.14 to $99.60 per barrel and wholesale gasoline decreased $0.01 to $2.89 per gallon

The Bloomberg gold spot price fell $25.32 to $1,309.38 per ounce

Manufacturing activity slows more than expected but continues to grow

The preliminary Markit U.S. Manufacturing PMI Index declined to 55.5 in March from 57.1 in February—a 45-month high—and compared to the 56.5 level that economists surveyed by Bloomberg had expected, with a reading above 50 denoting expansion. Despite the slower-than-forecasted growth, the report showed output and new orders “rose sharply,” while employment increased for the ninth month running. The release is independent and differs from the Institute for Supply Management’s Manufacturing Index, as it has less historic value and Markit weights its index components differently.

Treasuries were mixed, with the yield on the 2-year note ticking 1 basis point higher to 0.44%, while the yield on the10-year note declined 1 bp to 2.73% and the 30-year bond rate decreased 4 bps to 3.57%.

Tomorrow, the U.S. economic calendar will offer a look at the S&P/CaseShiller Home Price Index, with the 20-city composite forecasted to rise 0.6% month-over-month in January on a seasonally-adjusted basis, as well as Consumer Confidence, with economists anticipating a slight uptick to a level of 78.5 for March, from the 78.1 posted in February.

Europe lower, Asia higher

The European equity markets finished lower, with sentiment being hampered by another disappointing read on Chinese manufacturing activity, while tensions in Ukraine continued to hamstring momentum. Traders digested some mixed Eurozone business activity reports. The preliminary Eurozone Composite PMI Index—a gauge of business activity in both the services and manufacturing sectors—dipped to 53.2 in March, from 53.3 in February. However, the index continued to depict expansion, denoted by a reading above 50, and remained near a three-year high. The report benefitted from a jump in French business activity to expansion territory, while German output slowed more than anticipated, but continued to depict expansion.

Stocks in Asia finished higher, despite another disappointing read on Chinese manufacturing activity, with Japanese markets returning to action after Friday’s holiday. China’s preliminary HSBC Manufacturing PMI Index declined to 48.1 in March, from 48.5 in February, and compared to the 48.7 reading that economists had projected. This was the fifth-straight monthly deterioration for the manufacturing index and the third-consecutive month depicting contraction, denoted by a reading below 50. Chinese stocks gained ground as the report fostered optimism that the government may deploy further stimulus measures in order to meet its economic growth target of 7.5%. In India advanced after the government reported bigger-than-expected proceeds from selling stakes in state companies aimed at narrowing its fiscal deficit, while a separate report showed strong foreign investment in the nation.

Market Insights 3/23/2014

Stocks Lose Despite Early Morning Gains

After starting the day higher, the major U.S. equity indices eased well off their highs and closed the trading session lower. Increased levels of volatility and volume may have been attributed to quadruple witching today, which is the simultaneous expiration futures and options contracts on indexes and stocks as well as an S&P Index reweighting. Treasuries were mostly higher with no major releases from the domestic economic calendar today.

The Dow Jones Industrial Average decreased 33 points (0.2%) to 16,298

The S&P 500 Index lost 6 points (0.3%) to 1,866

The Nasdaq Composite was 43 points (1.0%) lower at 4,277

In heavy volume, 1.9 billion shares were traded on the NYSE, and 3.0 billion shares changed hands on the Nasdaq

WTI crude oil increased $0.56 to $99.46 per barrel, wholesale gasoline gained $0.01 to $2.91 per gallon

The Bloomberg gold spot price added $6.08 to $1,333.85 per ounce

Markets were higher on the week, as the DJIA gained 1.5%, the S&P 500 Index increased 1.4%, and the Nasdaq Composite Index added 0.7%.

Economic calendar empty to close out an upbeat week

Treasuries were mostly higher, while the U.S. economic calendar offered no major releases today, with the yield on the 2-year note nearly unchanged at 0.42%, while the yield on the 10-year note declined 3 basis points (bps) to 2.74%, and the 30-year bond rate dropped 6 bps to 3.61%.

This week’s economic front offered some upbeat reports that the recent softer-than-expected data may have reflected the impact of the severe winter weather across the nation rather than an underlying slowing of the economy. Industrial production for February topped expectations, along with Leading Indicators, while jobless claims were better than expected, existing home sales matched forecasts, and manufacturing output in the Mid-Atlantic region jumped back into a level depicting expansion.

Economic data to quiet down next week

The U.S. economic calendar will be headlined by durable goods orders, as well as the preliminary Markit US Manufacturing and Services PMI Indexes for March, the S&P/CaseShiller Home Price Index, the Richmond Fed Manufacturing Index, Consumer Confidence, new home sales, the third and final reading on 4Q GDP, pending home sales, the Kansas City Fed Manufacturing Activity Index, personal income and spending, the PCE deflator, and the final University of Michigan Consumer Sentiment Index reading for March.

Europe mixed, Asia higher

The European equity markets finished mixed, with U.S. economic optimism following this week’s upbeat economic data being met with lingering cautiousness toward Russia. Russian stocks saw some pressure as the nation saw the international community step up sanctions on the nation in the wake of Crimea’s vote to secede from Ukraine and join Russia. Russia had its credit rating downgraded by Standard & Poor’s and Fitch Ratings. In economic news in the region, Italian industrial orders rebounded in January, while U.K. public sector net borrowing came in below expectations for February.

Stocks in Asia finished broadly higher with sentiment finding support from the solid gains in the U.S. yesterday, courtesy of some upbeat economic reports. However, volume may have been lighter than usual as Japanese markets were closed for a holiday. Chinese stocks rebounded amid optimism that the government will help the sector by loosening some restrictions aimed at boosting funding for banks and developers to aid the economy in reaching its growth target.

Market Insights 3/20/2014

Stocks Move Higher

The U.S. equity markets closed the trading session nicely higher, as positive domestic economic reports may have helped boost trader sentiment. This allowed equities to reclaim most of the previous day’s losses. Existing home sales in February matched estimates and weekly jobless claims were lower than expectations, while the Philly Fed Manufacturing Index and Leading Indicators both came in stronger than projected. Treasuries were slightly lower following the data.

The Dow Jones Industrial Average increased 109 points (0.7%) to 16,331

The S&P 500 Index moved 11 points (0.6%) higher to 1,872

The Nasdaq Composite gained 12 points (0.3%) to 4,319

In moderately-light volume, 630 million shares were traded on the NYSE, and 1.8 billion shares changed hands on the Nasdaq

WTI crude oil declined $0.27 to $98.90 per barrel and wholesale gasoline gained $0.03 to $2.90 per gallon

The Bloomberg gold spot price fell $2.71 to $1,326.89 per ounce

Existing home sales match forecasts, while jobless claims come in below expectations

Existing-home sales fell 0.4% month-over-month in February, matching the estimate of an annual rate of 4.6 million, while January’s figure was unrevised at a 4.62 million unit pace. The median existing-home price rose 9.1% from a year ago to $189,000. The supply of homes available for sale equated to 5.2 months of supply at the current sales pace. Single-family home sales fell 0.2% m/m and multi-family sales declined 1.8% m/m. Sales of existing homes reflect closings from contracts entered one-to-two months earlier.

However, sales of previously owned homes are at their lowest level since July 2012, with the slowdown since last summer due in part to the rise in borrowing costs. Most believe the housing market has taken a temporary pause while buyers digest the changing affordability of housing and the supply of homes adjusts.

Elsewhere, weekly initial jobless claims rose by 5,000 to 320,000 last week, below the 322,000 level that economists had expected, as the prior week’s figure was unrevised at 315,000. Moreover, the four-week moving average, considered a smoother look at the trend in claims, declined by 3,500 to 327,000, while continuing claims rose by 41,000 to 2,889,000, north of the forecast of economists, which called for a level of 2,880,000.

Treasuries were slightly lower, following yesterday’s sell-off on the short-to-intermediate end of the curve. The yield on the 2-year note was nearly unchanged at 0.42%, while the yields on the 10-year note and the 30-year bond increased 1 basis point to 2.78%, and 3.67%, respectively.

Europe pares losses, Asian stocks slide on Fed comments

The European equity markets pared early losses and finished mixed as the upbeat U.S. economic data helped sentiment. Stocks in the region were hamstrung prior to the U.S. data by concerns about sooner-than-expected interest rate hikes in the U.S. The concerns came as Fed Chairwoman Janet Yellen suggested yesterday that rates could rise around six months after the Central Bank ends its monthly asset purchase program. In economic news in the region, Switzerland’s trade surplus widened slightly for last month, while German producer prices unexpectedly came in flat for February, compared to the 0.1% increase that economists had projected.

Stocks in Asia finished broadly lower following yesterday’s comments from Fed Chairwoman Janet Yellen, which added to the lingering Chinese economic growth concerns. Meanwhile, mining issues weighed on Australian stocks as gold prices fell, and the S&P/ASX 200 Index declined.

Market Insights 3/19/2014

Stocks Slide Following Fed Statement

The U.S. equity markets posted steep declines in the wake of testimony delivered by Federal Reserve Chairwoman Janet Yellen, which suggested that the target range for the federal funds rate may increase “something on the order of around six months,” after its asset purchase program ends. In the no surprise category, tapering of an additional $10 billion was announced from the current bond buy=back program. Treasuries were solidly lower following the Central Bank’s decision, while a separate report showed that domestic mortgage applications declined last week.

The Dow Jones Industrial Average decreased 114 points (0.7%) to 16,222

The S&P 500 Index moved 11 points (0.6%) lower to 1,861

The Nasdaq Composite declined 26 points (0.6%) to 4,308

In moderately-light volume, 662 million shares were traded on the NYSE, and 2.0 billion shares changed hands on the Nasdaq

WTI crude oil rose $0.29 to $99.17 per barrel, wholesale gasoline declined $0.03 to $2.87 per gallon

The Bloomberg gold spot price fell $26.88 to $1,328.91 per ounce

Markets wonder if the first rate hike will come sooner than expected

The statement from the two-day Federal Open Market Committee meeting was released at 2:00 p.m. ET, where the Fed announced that information received since the Committee met in January indicates that economic growth slowed during the winter months, in part reflecting adverse weather. As expected, the Central Bank revealed it will continue to reduce the pace of its current stimulus program by $10 billion to $55 billion a month.

The Committee dropped its reference to the thresholds of 6.5% unemployment and inflation no more than a half a percentage point above the Committee’s 2 percent longer-run goal for keeping the target fed funds rate exceptionally low. In its place remains an assessment based on “a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.” The Committee continues to expect that it will likely be appropriate to maintain the current target range for the federal funds rate for “a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.”

The economic projections that accompanied the statement slightly increased the median estimate for the targeted funds rate at the end of 2015 and 2016 from the December projections, but Fed Chairwoman Yellen in her press conference that followed the statement tried to downplay the “limited” increase, saying that forecasts will change over time. During the press conference Yellen noted that a “considerable time” is probably around six months, reinforcing the possibility that a rate hike could come sooner than market participants may have expected.

The MBA Mortgage Application Index declined 1.2% last week, after the index decreased 2.1% in the previous week. The drop came as a 1.3% decline for the Refinance Index was accompanied by a 0.9% decrease for the Purchase Index. However, the average 30-year mortgage rate declined 2 basis points (bps) to 4.50%.

Treasuries were solidly lower following the Federal Reserve developments, with the yield on the 2-year note increasing 8 bps to 0.42%, the yield on the 10-year note gaining 9 bps to 2.77%, while the 30-year bond rate increased 4 bps to 3.65%.

Tomorrow, the U.S. economic calendar will yield the release of the weekly initial jobless claims report, expected to increase by 7,000, to a level of 322,000. After the opening bell, investors will get the latest Philly Fed Manufacturing Index, anticipated to increase to a level of 3.2 for March, after unexpectedly declining to -6.3 in February, with zero the demarcation point between expansion and contraction in activity. Also, existing home sales will be reported, expected to decline 0.4% m/m to annual pace of 4.60 million units in February, from 4.62 million units in January.

Europe and Asia mixed

The European equity markets finished mixed, on the heels of two sessions of gains that came on eased geopolitical concerns following Russian President Putin’s comments yesterday that suggested the nation will not pursue further division of Ukraine after Crimea voted to secede and join Russia. Traders were cautious ahead of today’s conclusion of the monetary policy meeting from the U.S. Federal Reserve. In economic news, Eurozone construction output rose in January and the region’s 4Q wage growth accelerated, while U.K. jobless claims fell by a larger amount than expected for last month. Ehe Bank of England released the minutes from its March meeting, showing policymakers voted unanimously to keep its benchmark interest rate at a record low of 0.50% and maintain its asset purchases. BoE Chancellor Osborne delivered the budget in front of parliament, raising the U.K. economic growth outlook for this year and next. But insurance stocks took a beating to pressure the U.K. markets as Osborne dropped a requirement that retirees would have to buy annuities with their pension funds.

Stocks in Asia finished mixed as yesterday’s comments from Russian President Putin were offset by property-related concerns in China and traders treaded cautiously ahead of today’s monetary policy decision from the U.S Fed. A report out of Japan showed the nation’s trade deficit narrowed by a smaller amount than expected in February, as export growth missed forecasts. Chinese property-related stocks came under pressure as a private developer in the country collapsed yesterday, per Bloomberg. The report fostered concerns in the property sector and came less than two weeks after the mainland’s first onshore bond default by a Chinese company.

Fed Shifts Criteria for Rate Hike, Market Suffer

The Federal Reserve on Wednesday scaled back its bond-buying stimulus strategy again and gave itself more leeway to keep short-term interest rates at zero until 2015, but the bank also rattled financial markets by suggesting that rates could rise a bit earlier and faster than investors had expected. The new approach still means the first rate hike since 2006 is a long way off, investors reacted negatively. U.S. stocks slumped and the dollar rose after the move.

What seemed to alarm Wall Street was a shift in the Fed’s outlook for interest rates. The bank now expects short-term rates to rise a bit quicker in 2015 and 2016 than officials previously forecast. For instance, Fed officials believe the fed funds rate could reach 2.25% by the end of 2016 instead of 1.75% under their old forecast. In her first press conference as new Fed chairwoman, Janet Yellen also suggested the first rate hike could take place within six months after the bank ends its bond-buying program. If so, the first rate hike could occur as early as the spring of 2015 — sooner than Wall Street anticipated.

No more unemployment target

The Fed dropped its 6.5% unemployment-rate target for the first rate hike and said it would look at a “wide range” of factors, including inflation levels and job creation, before charting out a new path.

Yellen downplayed the Fed’s revised rate forecast and said the bank will carefully evaluate a wide range of factors before taking any action. Read text of the decision. Fed officials stressed the economy is still running below peak levels and may warrant short-term rates remaining lower than what the Fed “views as normal in the longer run.”

“They took out any numerical thresholds and are basically going to look at everything,” said Stuart Hoffman, chief economist at PNC Financial Services. “They are no longer going to draw any numerical lines in the sand.”

The more fluid Fed approach, however, may make it harder for investors to figure out when the bank will start to raise rates and it could actually inject more uncertainty in financial markets. Yellen acknowledged that the Fed would have to straddle a fine line in deciding when to act.

In a move that was widely expected, the central bank again reduced its bond-buying plan by $10 billion to $55 billion. This is the third straight meeting with a $10 billion reduction. Economists expect the Fed to maintain that pace of tapering unless economic conditions take a severe turn for the worse. With the tapering seemingly on a virtual pre-set course, investors have been much more focused on what the Fed had to say about the “lift-off” in rates. The central bank has kept its key interest rate at zero since December 2008.

In a statement, the Fed said that in determining how long to keep rates at zero, the central bank “will assess progress — both realized and expected — toward its objectives of maximum employment and 2% inflation.” The Fed said that it will “likely be appropriate to maintain the current target range for the federal fund rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the policy committee’s 2% longer-run goal.”

In 2012, the Fed said it planned to keep short-term interest rates near zero at least as long as the unemployment rate was above 6.5% and inflation cooperated. In December, with the unemployment rate dropping sharply, the Fed said it wouldn’t consider the first rate hike until “well past” the time when unemployment dropped below the threshold. The Fed did remove language saying that accommodative policy remains appropriate “for a considerable time.”

Fed officials continue to expect the first rate hike will occur next year. Thirteen of 16 senior officials believe the first increase in the fed funds rate won’t take place until 2015, with rates rising somewhat faster in 2016.

Fed set to roll out new low-rate pledge

The Federal Reserve has said again and again that it wants to keep interest rates low for a long time. But it keeps fiddling with how to express that commitment.

Another shift in that communications strategy is set to occur when the central bank’s interest-rate-setting committee gathers for two days of talks on Tuesday and Wednesday, as it’s the first meeting to be led by Janet Yellen, the new chairwoman. The Fed will release a policy statement and updated economic forecasts at 2 p.m. Eastern on Wednesday, and Yellen will hold a press conference at the end of the deliberations at 2:30 p.m.

With the Fed and the markets basically on the same page on the economy, the current near-zero interest-rate policy, and the rate of reduction in bond purchases, the central bank has an opportunity to revamp its forward guidance tool, now the chief policy instrument.

So-called forward guidance attempts to drive down long-term rates by promising to keep short-term rates low for a long time. The Fed has reworded its pledge throughout the financial crisis. Alexander said the early forms of forward guidance were simpler as the Fed was simply saying that it was a long way from raising rates.

The Fed’s current pledge is to hold rates steady until “well past” the point when the unemployment rate falls below 6.5%.But the unemployment rate has steadily dropped over the past year, before ticking up slightly to 6.7% in February.

Many believe It’s time to seriously rethink that 6.5% unemployment target because we are so close to it. Yellen has signaled that she would be comfortable with this change when she told lawmakers last month that the unemployment rate did not fully summarize the health of the labor market. Experts don’t think the Fed will simply lower the threshold to a 6% unemployment rate. Instead, the prevailing view is the Fed will move to a more “holistic” description of labor-market activity.

It’s not the only item on the Fed’s agenda.

Another focus will be on the Fed’s growth, inflation and interest-rate forecasts. The market now expects the fed funds rate to be 0.6% by the end of 2015, implying one rate hike. This is close to the Fed’s own projection as economists expect the Fed’s forward guidance to be tested once the weather impact clears. Yellen told the Senate Banking Committee late last month that it is “difficult to discern exactly how much” bad weather was obscuring the economic outlook.

If markets started to price in an earlier tightening, the Fed might be forced to be more specific with its guidance. The timing of the first rate hike in mid-2015 appears to be the “line in the sand,” he said. So, for the time being, he said, the Fed “can use words.” As for the Fed’s bond-purchase program, it’s barely in the spotlight after dominating the agenda for so much of last year. Despite generally weak data since its last meeting in January, the central bank is widely expected to continue to reduce the pace of its monthly asset purchases by a further $10 billion, to a rate of $55 billion a month

This would be the third straight Fed policy meeting with a gradual reduction in the pace of purchases. Analysts expect the slow reduction to continue until the program is fully wound down, at the end of the third quarter. Only a shock to the economy would cause the Fed to change course.