Shockingly bad housing data this week, and now theFed's downgrade of the economy could ramp up market anxiety with each new economic report.
Two reports are expected Thursday -- weekly jobless claims and durable goods. Jobless claims, which have stayed at a stubbornly high level, are expected to be about 460,000, down slightly from last week's 472,000. Durable goods orders for May are expected to be down 1.4 percent, after April's 2.9 percent gain, which was inflated by a high level of aircraft activity.
Stocks were mixed and barely changed Wednesday, after the Fed warned that financial conditions weakened due to problems overseas.
"The key take away - the most important thing was in April, they said inflation was subdued, and now they say it's trending lower," said Marc Chandler, chief currency strategist at Brown Brothers Harriman. Chandler said the comment stirred up speculation the the Fed could embark on a new quantitative easing program, where it would buy mortgages or other securities, as it did during the financial crisis.
"Maybe some Fed officials are thinking about quantitative easing because inflation is so low. I don't think they're there yet, but this statement about trending lower is interesting," he said.
LPL Financial's chief market strategist Jeffery Kleintop said he thought the Fed's economic downgrade was minor. "They were quick to say nonetheless they anticipate growth will continue," he said.
"The Fed knows a lot more about that's going on behind the scenes in Europe than any of us do," said Kleintop, adding the Fed's concerns seem tempered. He also noted they did not change the statement much, which was reassuring to the market.
Miller Tabak chief economic strategist Dan Greenhaus suggested, in a note, that the talk about the Fed pursuing quantitative easing does not make sense. The Fed, he noted, cannot increase the money supply, only the banking system can. The main effect of its last quantitiave easing program and the expansion of its balance sheet resulted in an enormous build of excess reserves in the banking system.
"As such, implementing a second QE program is akin to stocking your shelves with more apples because your existing stock of apples isn't selling well enough. Holding all else constant, you're just going to end up with more apples on the shelves," he wrote.
The Dow finished up 4 at 10,298, and the S&P 500 was down 3 at 1092. Treasurys saw buying throughout the day after poor new home sales data, but the 5-year auction was surprisingly weak. The Treasury auctions $30 billion in 7-year notes Thursday.
The number of new homes sold in May fell to 300,000, an all time low, and well below the anticipated 435,000. The month-over-month percentage drop in new home sales of more than 32 percent was also the largest ever. There were also big revisions to prior months' data, yet home builders stocks - like Hovnanian, KB Homesand Toll Brothers- all rose. Some traders said there was speculation housing couldn't get much worse, and the stocks have gotten cheap.
Softness isn't only being seen in data. Several consumer stocks had disappointing earnings news late Wednesday.
Darden Restaurants fourth quarter earnings fell 6 percent to $115.6 million or $0.80 per share, compared to the year earlier. The company reported softer sales at Olive Garden, down 1.5 percent and Red Lobster, down 4.6 percent. Its LongHorn Steak sales increased by more than 2 percent.
Nike said foreign exchange and input cost inflation will put significant pressure on its top and bottom line results in fiscal 2011, after reporting a 53 percent increase in fourth quarter profits, including restructuring charges. Its stock fell as revenues disappointed.
Bed Bath and Beyondreported a stronger than expected fiscal first quarter, with profits of $0.52 per share on sales of $1.92 billion. But the company forecast weak second quarter earnings and its shares fell sharply.
Delllate Wednesday guided its fiscal 2011 non-GAAP operating income to grow 18 to 23 percent. Dell made the announcement ahead of its analyst meeting Thursday, and its stock was basically unchanged in after hours trading.
Earnings expected Thursday include Research in Motionand Oracle, after the bell. Conagra, Discover, Lennar and McCormickreport ahead of the opening bell.
"This is reporting announcement season. We have had some bad news, but I think overall investors will be surprised. Europe is not having that big an effect on a lot of U.S. companies," said Kleintop. "I think with profit margins so wide and tax and interest expenses so low, we'll have a pretty good earnings season..That might help stocks up to the high end of the range."
Kleintop said earnings may not look as good after the second quarter earnings period. He also believes, for now stocks are stuck in a range.
"The volatility that we've seen this year is probably going to continue through the second half of the year. The good news is the recovery (phase) is over and the bad news is now we have to deal with sustaining it," he said, noting it will be more difficult as fiscal stimulus is pulled away. He does not believe the economy is going to double dip.
Kleintop said the market may break out and move back toward 1200 on the S&P 500 after the mid-term election, particularly if the Republicans make a good showing in Congress. Both parties would then own the current problems. "You probably would get a more moderate and more sustainable path toward a solution. You just don't get more partisanship..that may be a positive for the market, and may be one of the reasons we get a rally after the election," he said.
"It lends itself a little more toward compromise," he said.
What Else to Watch
Derivatives are on the agenda for Congressional conferees working to combine the House and Senate financial regulatory bills.
President Obama welcomes Russian President Medvedev to the White House.
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