Fed easing and the wobbly dollar will again be the talk in Tuesday's markets, but Intel's after-the-bell earnings may shift the focus to corporate balance sheets and the heavy hitters reporting later this week.
Stocks drifted Monday and ended nearly unchanged, with the Dowfinishing 3 points higher at 11,010 and the S&Pup less than a quarter point at 1165. The bond market was closed for the Columbus Day holiday, and stock market volume was a light 3.1 billion shares.
The dollar defied its recent trend and rose 0.4 percent against the euro, to $1.3873. The dollar index was 0.2 percent higher at 77.49 in late afternoon trading, but its move did not deter a heated rally in some commodities.
Corn futures gained 5 percent Monday in the second day of a rally, sparked Friday when the USDA cut its crop outlook. The two-day move is the biggest for corn in more than 20 years, and it helped drive a 9.9 percent move Monday in ethanol futures. Corn is the main feedstock used in ethanol production. Copper and gold also rose.
The 2 p.m. release of the minutes of the Fed's last meeting Tuesday will keep "quantitative easing" speculation swirling, as Fed watchers weigh each word for clues on what would make the Fed pull the trigger on further easing.
After Friday's disappointing jobs report, traders are even more convinced the Fed will announce at its Nov. 3 meeting that it will resume buying Treasury securities. An exclusive CNBC survey showed that 93 percent of the 70 responding economists and market participants expect the Fed to resume quantitative easing, up from 69 percent two weeks ago. Also, 86 percent now expect that announcement to be made in November, up from 38 percent previously.
Michael Darda, chief economist and market strategist at MKM Partners, said he fears the Fed may be doing too much. "I am of the belief that this is probably overkill. If I was on the Fed, I would vote against it. I think the benefit is somewhat questionable and the cost could be substantial because at some point the Fed is going to have to worry about an exit strategy," said Darda.
Darda's view is the economy is not going to be as weak next year as many forecasters expect. He expects real GDP to average 2.0 to 2.5 percent in the second half of this year, followed by growth in the mid-3 percent range next year.
"We have been under the assumption since last summer that a temporary slowdown would give way to stronger growth. This predates the QE drum beat...If the Fed is going to do more, it's probably putting a bid under risk assets," he said.
Tuesday's economic news also includes the NFIB small business survey, released at 7:30 a.m. The Treasury auctions $32 billion in 3-year notes at 1 p.m.
Important to currency markets will be two speeches by European bankers in New York Tuesday. Bundesbank head Axel Weber speaks at noon, and separately European Central Bank President Jean-Claude Trichet speaks to the New York Economics Club at 12:15 p.m.
Darda says he's more bullish on stocks than other assets. "They were the cheapest asset class around and the least popular," he said. Treasurys, he says, should be avoided, and the yield on equities is better than corporate debt.
"I'm very bullish in the near term, but I worry on a three- to five- to 10-year horizon that we're going to have unintended consequences that are going to make it difficult to unwind it," he said. Darda said he expects the S&P 500 to make new highs before the current bullish cycle ends.
Bullishness has certainly risen in the stock market in general, as the September rally continues into October.
Raymond James chief market strategist Jeffrey Saut said even as the market has risen, many institutions and hedge funds remain underinvested.
"I think we're going up. It's overbought and everything else...but if we can get through October without any serious setbacks....keep in mind many mutual funds close their books at the end of this month. I've been on the phone talking to these guys and these guys are underweight equities," he said.
"In midterm elections, the average (stock market) gain is something like 13 percent...This market is a nightmare for underinvested portfolio managers," he said.
Stock traders will be watching a number of earnings reports Tuesday. Intel, which previously warned on revenues, reports earnings after the bell Tuesday. The company is expected to earn $0.50 per share, on revenues of $10.99 billion. Margins are expected to be around 66 percent.
Chevron releases an interim earnings report, and CSX also reports. Fastenal reports ahead of the open.
Saut is watching for J.P. Morgan's report Wednesday, and he says the conference call, hosted by CEO Jamie Dimon, will be one of the most important of the week, as it could set the course for bank stocks. Also reporting this week are Google on Thursday and General Electric on Friday.
Shawn McCambridge of Prudential Bache Commodities said the trend of rising grain prices should continue, and it is being helped by the weakening dollar. "Corn is going to be the leader as we go forward. We could see another reduction from the USDA when they issue their report in November," he said.
Soybeans, coffee and sugar were also higher Monday.
McCambridge said the ending stocks for corn are now projected at 902 million bushels, under the psychologically important 1 billion bushel level. The USDA sees supplies at 14.38 billion bushels, and projected use at 13.48 billion.
"We watch this closely because it's the case that when you get down to that kind of supply situation, you can't really absorb too much more lower production...It's still manageable but it doesn't leave a lot of room on the balance sheet," he said.
Earlier in the year, the USDA had been projecting a bumper crop and the outlook cut was more aggressive than expected. "The wet weather created problems through the first third of the season and then what we're finding out now too was the warm evenings didn't give the crop much time to rest and put a lot of stress on the corn," he said. "...It's still the third largest crop, and I believe this would be third or fourth highest yield on record. It's just the case that our demand has gone up so much in the last couple years so we almost need record crops every year to keep up with demand," he said. Ethanol manufacturing has been a growing source of demand.
McCambridge said the amount of corn that was growing gave the false impression of a bigger crop. "We produced an ear that was much shorter. (When) you start pulling the husks back and take into consideration the characteristics of the yield, then you can get a better look at the production number," he said.
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