Markets on alert for changes to Fed QE program

Overview and Observation:

The "mystery" orchestrated by the U.S. Federal Reserve continues. Will they "taper" or not. This week the markets looked at the possibility that while no policy changes were made for October, according to the Fed on Wednesday, the markets were wondering if that meant a new consideration by the Fed for the December meeting. Given the data recently reported of the U.S. ISM ticking higher to 56.4% in October from the September 56.2% indicated a pickup in manufacturing. That could add to the positive analysis by the Fed in other areas to support the "tapering" of the bond purchase program. We do not see the "economic improvement" as exemplified by some of the sector data so a "taper" of the program could spell "disaster" given our negative view of the U.S. economy.

As for China, the second largest consumer of goods, their official manufacturing Purchasing Managers Index rose to 51.4 in October from the September 51.1 and could indicate improved economic activity. That would bode well for global markets; however, the authenticity of their data is a question to us. Their final report is due Friday so we will hold off on any further analysis and implications for now. Now for some actual information to hopefully "guide" our readers through the maze of data…

Interest Rates:

December Treasury bonds (CBOT:ZBZ13) closed at 133 and 23/32nds on Friday, down 1 and 3/32nds pushing yields higher for the first week in the past three. Investors remain concerned over if and when the U.S. Federal Reserve will reduce its accommodative stimulus program. The market is on "alert" for any clue to what the Federal Reserve is planning and analyzing each statement by some of the regional Fed Presidents. A recent statement by the President of the Philadelphia Fed said he was "becoming worried" about how the Federal Reserve would "exit the program." A final reading of U.S. manufacturing purchasing managers’ index was 51.8 in October from the flash reading of 51.1 but below the 52.8 for September. We continue to consider the Treasury bond market as in a range awaiting any news. Our recommendations are available to clients.

Stock Indices:

The Dow Jones Industrial Average closed Friday at 15,615.55, up 69.80 and for the week gained 0.3%. The S&P 500 (CME:SPZ13) closed at 1,761.64, up 5.10, and for the week gained 0.1%. The tech heavy Nasdaq closed at 3,922.04, up 2.34 and for the week lost 0.5% mostly due to the drop in Apple stock. Some of the economic data this past week was somewhat attributable to the three week Government shutdown. The Institute for Supply Management said manufacturing remained strong in October with the index climbing to 56.4%, the highest reading since April of 2011, from 56.2% in September. Economists had expected a reading of 55%. The better than expected reading prompted the rally in equities. We, however, feel the markets are overbought based on projected p/e ratios and our view that the labor situation will continue to weigh on consumer confidence and spending.

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