By Carlos Guillen
Quite encouraging last week was that equity markets continued to reach new highs despite bears pointing to a correction, and on Friday the Dow Jones Industrial Average closed at yet another record closing level of 15,118.49, making it three new record closing prices in a week. Well ... bears are at it again today, pointing to the Fed's discussions of a reduction in the pace of monetary easing. As such, stocks are down ... but not that much.
Perhaps serving to put pressure on equity markets today was an article from the Wall Street Journal over the weekend that said the Fed had already mapped out a strategy for slowly winding down its 85 billion a month asset-purchase program as soon as officials feel confident about a sustained improvement in the economy. However, there was no indication of the timing of the action, and while bears are using this to prove their point, the news that the Fed will slow the pace of its monthly asset-purchase program is not new. Nonetheless, jittery investors will use this news to bailout today, only to get back in tomorrow.
Very surprising today, in a positive way, was that retail sales data showed that the consumer stepped up its discretionary spending. According to the U.S. Census Bureau, retail sales during April increased year-over-year by 3.7 percent and increased month-over-month by 0.1 percent, better than the Street's consensus estimate calling for a 0.3 percent month-over-month decline. Excluding automobile related revenues, retail sales increased year-over-year by 2.8 percent and decreased month-over-month by 0.1 percent, better than the Street's consensus estimate calling for a 0.2 percent month-over-month decline. Of the thirteen categories that make up the result, only three declined, led by a 4.7 percent decrease in gasoline stations. Given the importance of consumer spending, as it represents 70 percent of gross domestic product (GDP), this unexpected reversal in retail sales will certainly bode well for second quarter GDP growth.
In all, despite some shaky trading at the start of today's trading session, stocks have reached some stability, and the Dow is down just 0.2 percent. The rest of this week promises to be more eventful, with a number of economic data points such as empire manufacturing, building permits, and Michigan Sentiment being displayed.
Beginning of the End of Cheap Money?
By David Urani
Last week we mentioned the Fed wind-down rumors that drove some dollar strength and market weakness on Thursday and Friday. Some of that speculation was driven by murmurs about an article from WSJ reporter Jon Hilsenrath, who is known for his close relationship with the Fed. Well, that article was indeed released today and it did illustrate some sense of a willingness to dial down QE by the Fed.
Nevertheless, the language was not concrete as the Fed still doesn't seem to have made any decisions. In a nutshell, the economy and markets have been looking better and therefore at some stage it would be prudent to start curtailing those $85 billion of monthly bond purchases. But there's still no indication that the Fed will be doing this right away.
As far as the actual wind-down goes, the Fed would likely take it slowly as pulling the whole punch bowl away at once could be a shock to the system. Surely the Fed will have a measured approach. In the end, I don't think this article necessarily brings up anything groundbreaking or any points that trader's hadn't already considered with respect to the Fed; obviously they aren't going to go on like this forever.
That being said, QE and low rates have certainly been some boost to the markets, if for no other reason than psychological. The market may remain wary of QE withdrawal, but in the end any decision to slow down QE would be based on improving fundamentals. Likewise, fundamental improvements in the economy may trump an initial, slight decrease in Fed money printing.
The dollar has continued to move a little higher, up approximately 1.6% in the last three sessions versus a basket of currencies.