The comments of Fed officials this week could be the balm the markets need, but they could just as easily prove to be the source of more anxiety.
A parade of Fed speakers will be out, and traders will be watching closely for any hints of what the Fed might do when it meets Dec. 11. The betting is on a rate cut, but recent comments from the Fed and its officials have discouraged the idea that another rate cut is guaranteed. That has investors worried despite the belief by many in the markets that a 1/4 point cut is definitely in the cards.
Speaking of worried, look at the casualties in Monday's markets. The three major stock indices are all now down slightly more than 10% from their October highs, making them technically in a "correction."
The flight-to-quality trade into Treasurys continues at a frenzied pace, with the 10-year yield slumping by late Monday to 3.848%, its lowest yield since March, 2004 and the two-year at 2.940%, its lowest yield since December of that year.
The Dow Monday lost 237 points or 1.8% to 12,743. The Nasdaq was off 2.1% or 55.61 points at 2540.99, and the S&P 500 slumped 33.48 points, or 2.3%, to 1407.22.
Birinyi Associates says the last time the Dow staged a 10% decline was in the period between Nov. 27, 2002 and March 11, 2003. That makes this current rally (1,673 days) the second longest since 1962, Birinyi said in a note.
Two Fed officials are speaking Tuesday. Philadelphia Fed President Charles Plosser speaks on the economic outlook in Rochester, N.Y. at 12:20 p.m. Chicago Fed President Charles Evans, who is an FOMC voting member, speaks on the U.S. economy at the Futures Industry Association expo in Chicago at 1:30 p.m.
Other important items to watch Tuesday include consumer confidence, released at 10 a.m. and the Richmond Fed Survey, issued at the same time. The closely followed S&P Case Shiller home price index will be reported before the opening bell.
Comments from the Fed officials will be watched very closely by markets, particularly after last week's Fed outlook showed continued concern by the Fed about inflation and recent comments that the Fed may have cut rates enough. "I think we've got a water torture kind of challenge to deal with here," said J.P. Morgan Securities' Edward Marrinan. He said there is a perception the Fed as "turning a kind of "blind eye" toward many in the market place."
Minutes from the Fed's last meeting showed its Oct. 31 rate cut was a "close call." That comment disturbed stock traders as did recent comments from Fed Governor Randall Kroszner that the Fed's current policy stance appears appropriate to get the economy through its current "rough patch."
Marrinan said the discomfort in credit markets is likely to take some time to resolve. "I think there is a feeling that investors are coming to realization that this problem is not going to cure quickly or without extracting further considerable pain," he said..
"Where we are in this his process depends on what the Fed is going to do next, what the economy is going to do, and how financial institutions choose to deal with their losses," he said. Before the Fed's meeting, the markets will also focus on the Dec. 7 jobs report, a key in showing the health of corporations. Also important, he said, is the approaching year end for broker dealers as it could result in more news about credit problems and writedowns.
He said the consumer is a key component in the economic picture so holiday sales will be an even more important factor than normal this year. Early results shows that store traffic increased on this year's "Black Friday" shopping weekend, but that consumers spent less than last year.
Financials Melt Down
Fear of more writedowns was one factor in the stock market's selling spree Monday, as was concern about the underlying health of some of the largest U.S. financial institutions. The stock market made relatively low-key moves early in the day, but by midafternoon the wave of panic gripping credit markets moved into stocks.
The S&P financial sector saw 4% of its value wiped out in Monday's market. Leading the charge down hill were Citigroup , Fannie Mae , Freddie Mac and Countrywide . In the early afternoon, Sen. Charles Schumer (D-N.Y.) called for a probe into the heavy borrowing by Countrywide from the Federal Home Loan Bank of Atlanta, adding to negative sentiment already swirling around Countrywide and the financial group.
Citigroup slumped below $30 per share for the first time in more than five years, as CNBC's Charles Gasparino reported exclusively that the bank is considering major layoffs. The Wall Street Journal also reported on the shape of Citi's mortgage portfolio, and traders said there were concerns of more losses at the bank.
More Fed Speak This Week
Other Fed speakers out this week include Fed Chairman Ben Bernanke, who will discuss the national and regional economy at the Charlotte Chamber of Commerce in Charlotte, N.C. at 7 p.m. Thursday. There are no questions following his speech.
Fed Vice Chairman Donald Kohn though speaks at the Council on Foreign Relations Wednesday morning at 8 a.m., and he will take questions from the audience there. Dallas Fed President Richard Fisher is also speaking Wednesday. His topic is the Fed and the regional economy in Amarillo, Texas. He will answer questions after the 1:30 p.m. speech.
Fed Governor Frederic Mishkin will give a lecture before the Undergraduate Economic Association at MIT Thursday at 4:30 p.m. He will also take questions.
On Friday, Fed Governor Randall Kroszner speaks at the Philadelphia Fed at 1:40 p.m. on "Innovation, information and regulation in financial markets." He also will take questions. St. Louis Fed President William Poole, also an FOMC voting member, speaks at the Cato Institute on market bailouts and the "Fed put" in Washington at 4 p.m. Friday.
In another scoop, CNBC's Melissa Francis reported on "The Call" Monday morning that sources told her that Saudi Arabia increased production. That report helped push oil lower Monday. Oil finished at $97.70 per barrel, off 0.5%.
The dollar meanwhile fell 0.3% to $1.4878 per euro Monday. Year-to-date, the dollar has lost 11% against the euro. The dollar fell 1% against the yen to 107.26 yen per dollar. The dollar has lost 10% to the yen since the beginning of the year.
A few retailers report earnings Tuesday, including American Eagle, Talbot's, and Staples, all before the bell. Analog Devices and Marvell Tech report after the bell.
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