Dismal news on housing overwhelmed stocks Tuesday, and the markets now look to Wednesday's housing and durable goods reports with newly lowered expectations.
The end of the home buyer tax credit sent existing home sales for July down 27 percent, to a shocking 3.8 million units, the biggest one-month drop ever and the weakest number in 15 years.
The Dow immediately went into a tailspin but closed above its lows at 10,040, down 133. The S&P 500 lost 15 points to 1051. Bonds meanwhile found plenty of buyers, and yields slid. The 2-year note yield fell to a new low of 0.45 percent, before finishing at 0.48, and the 10-year hit an intraday low of 2.47, its lowest yield since March, 2009.
Commodities were thrown out with stocks on slowing growth prospects, and oilfell to an 11-week low of $71.63 per barrel, a decline of 2 percent.
"Data continues to come in with multiple orders worse than expected. You don't have a lot of these acceleration moves lower when you're having a recovery," said John Briggs, Treasury strategist at RBS.
Wednesday's data includes new home sales and durable goods, both at 10 a.m. The Treasury auctions $36 billion in 5-year notes at 1 p.m.
Stephen Stanley, chief economist with Pierpont Securities, said the new home sales could be interesting since they showed improvement in June over May. Existing home sales tend to lag new home sales data by a month or two because of the way they are recorded, he noted. He expects new home sales at 340,000 in July.
He expects durable goods to be 2.7, but 0.5 percent when excluding defense and aircraft. "We should get a pretty big increase on the headline number, but it's mostly coming from the air show in July where a lot of orders were placed," he said.
U.S. markets followed European stocks lower Tuesday. The Irish market was particularly weak, with stocks down more than 5 percent, after Irish building materials company CRH issued a warning that the faltering U.S. recovery would hurt its earnings. CRH is the leading asphalt producer in the U.S.
But after the Wall Street close, Standard and Poor's delivered even more bad news. It cut Ireland's long term debt rating to AA- on concerns the high cost of supporting its ailing banks would hurt its financial flexibility. Ireland's National Treasury Management Agency later said Standard and Poor's reasons for the downgrade were flawed, and that it used an extreme estimate of 50 billion euros in bank recapitalization costs.
The euro moved lower after the news. Earlier in the day, it had hit a new record low against the Swiss franc. The yen was higher in evening trading Tuesday, close to 15-year highs against the dollar.
There's such a thing as too much transparency, say some traders who read the long and highly-detailed Wall Street Journal account Tuesday of the divide within the FOMC at its last meeting.
The much-discussed article appeared three days ahead of Fed Chairman Ben Bernanke's Friday address at the Kansas City Fed's annual symposium in Jackson Hole, Wyo. The article raises expectations for a speech that was already considered the biggest market event of the week.
This Jackson Hole meeting had been expected to be more important than most because of the questions raised by developments at the Fed's August meeting. In a statement after that meeting, the Fed downgraded its view on the economy and announced its return to a modified form of quantitative easing.
Traders say the Wall Street Journal article had a negative impact on market sentiment, as it showed that at least seven of the 17 Fed officials opposed or were concerned about the move back into quantitative easing. The Aug. 10 announcement of that move left markets confused by the timing and intent, and many economists were looking for some clarification from Bernanke.
The Fed's renewed program involves the purchase of Treasury securities with the proceeds from maturing mortgages, basically keeping the size of its balance sheet unchanged with the intent of preventing a passive tightening.
Yet, the market is convinced that the Fed is planning a second, bigger quantitative easing program, under which it would buy many more Treasurys.
"Clearly, he has a lot of questions to answer," said Stanley. He said that Bernanke's testimony to Congress July 21 made it seem as though the Fed was a ways off from considering quantitative easing.
"Basically, two or three weeks later, they're doing it. The markets have a lot of questions around that. There's a lot of questions around where the economy is going. If we went through that rapid a process, does that mean their assessment of the economy got radically worse? Obviously, the bottom line is what are they going to do next," he said.
Stanley said the markets are convinced the Fed will embark on a bigger quantitative easing program. "He could be very non committal about that and keep his position open, or he could down play the importance of what they did," he said.
The swift turnabout by the Fed at that August meeting raises questions about Bernanke's leadership, said Stanley. "Either it suggest his leadership is erratic or it suggests there's been a dramatic change in the economic view that dictated the move. Either way, the market is skittish," he said.
"I consider myself a half glass full kind of guy, and I'm a little concerned about what I've seen in the data in the last month. I can see why the Fed is worried," said Stanley.
Goldman Sachs economists, in a note, said the Wall Street Journal article suggests that the Fed is less likely to move on increased quantitative easing at its Sept. 21 meeting because of the split views on further easing. They also believe Bernanke may now be more backward looking in his speech than he might have been because of the disagreement over the future course of the Fed.
Zane Brown, chief fixed income strategist at Lord Abbett, said he thinks Bernanke may use the Jackson Hole event as an opportunity to steer markets away from the idea of more easing. "I think it's highly unlikely if the board is as upset and split about reinvesting the dollars. He's unable to find support for a new quantitative easing program that increases the level of quantitative easing," Brown said.
"The fact that the members are going in different directions reinforces the fact that investors as a group are uncertain, and it's justifiable now," he said. "They are looking for leadership and the leadership in the form of the Fed body is telling them they're doing exactly the right thing -- hide in cash and wait."
"I think people are going to look to him for leadership and words of advice and direction. He's been more professorial than fatherly or leaderly, and I think he needs to set his professorial nature aside and really provide some words of direction and advice because that's what people are looking for. I think it will be one of his more meaningful addresses, or at least investors expect it to be, " said Brown.
Briggs said the article may have deliberately intended to clear the air for Bernanke ahead of the Jackson Hole meeting. The minutes of that August Fed meeting, to be released next week, will show dissension on the FOMC. But investors now have more detail than they'd ever find in a Fed release on the meeting.
"This article puts the minutes into the realm of a collegial discussion," he said.
"I thought before this article that Bernanke was going to say something in his speech at Jackson Hole. Now he can focus on policy and not have to deal with this kind of thing. It's kind of like he nipped it in the bud," he said.
There are a few earnings expected, including results from Toll Brothers, American Eagle and Canadian Imperial Bank of Commerce. After the bell, JD Uniphaseand Tivorelease results. BHP Billiton posted earnings in line with analysts expectations with a 47 percent rise in second-half profit.
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