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Dovish Fed May Help Stocks Push Up to Multi-Year Highs

Weekly jobless claims and global manufacturing data could help drive the low volume markets of late August Thursday.

The Federal Reserve headquarters in Washington, DC.
The Federal Reserve headquarters in Washington, DC.

Lacking any nasty surprises, the Fed’s dovish tone could help put stocks back on track to take another run at multi -year highs. The minutes from the Fed’s last meeting, released Wednesday, renewed expectations that the Fed is ready to take more easing steps, including another possible round of quantitative easing or asset purchases.

HSBC flash manufacturing PMI data from China overnight, PMI data from Europe in the morning, and Markit PMI data for the U.S. at 9 a.m. ET should provide an update on global manufacturing activity.

There is also the 8:30 a.m. release of U.S. jobless claims, expected at 365,000, nearly the same as last week and important in that it is the same week as will be used in the survey for the August employment report, released in early September.

That employment report is the last major piece of data the Fed will have before its Sept. 12 meeting, and some Fed watchers believe only surprisingly very strong data would sway the Fed from acting.

Traders took the Fed’s comments Wednesday as much more dovish than they had expected and a signal that the Fed was already close to easing at the beginning of August when it last met. A recent batch of better-than-expected data, like July retail sales, had convinced traders in the past several weeks that the Fed was less likely to ease.

“They pretty much told you what they’re going to do. The risk is anything I think that takes them off that path,” said John Briggs, RBS senior Treasury strategist. “Really, we’re still waiting to hear from Bernanke at Jackson Hole.” Fed Chairman Ben Bernanke speaks Aug. 31 at the Fed’s annual Jackson Hole symposium, and Fed watchers expect him to give clues as to the Fed’s plans for further easing, as he did two years ago.

Stocks rose and Treasury prices fell Wednesday after the 2 p.m. release of the Fed minutes. The Dow ended the day down 30 at 13,172, while the S&P 500 was up a fraction of a point at 1413. The S&P Tuesday broke above its year high of 1422 and was trading temporarily at four year highs, before falling back. Nasdaq gained 6 points to 3073. The 10-year yield fell to 1.70 and was even lower in early evening trading.

“It was certainly stronger language than they need to do if they didn’t want to send a message. The message is better for risk asset and commodities than it is for Treasurys,” Briggs said.

He said it appears from the minutes that Fed officials are leaning toward changing the forward guidance, or extending the time period for how long they expect to keep rates low. Many Fed watchers have been expecting them to move the time frame from late 2014 to mid-2015. Briggs said the minutes also made it seem any quantitative easing program could be more flexible than those in the past. For instance, he said the timing or the amount of asset purchases could be open ended.

“They opened a Pandora’s box of questions,” he said.

While the market reaction was favorable, but somewhat subdued, not everyone is pleased with more Fed easing.

“What I think they should do and what I think they are going to do are two different things,” said Barry Knapp, head of equity portfolio strategy at Barclays Capital.

Knapp said the Fed is moving toward QE at a time when gasoline prices are already very high and could potentially hit the consumer going into the important holiday shopping season. QE helps lift risk assets, like stocks and commodities and drives down the lower.

“I think they should save their bullets. If things get really bad in Europe, easing makes sense,” he said.

But the Fed’s statement portrays officials that are concerned about the sluggish economy. “Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery,” the minutes said.

J.P. Morgan economists expect the Fed to take action in September. “In light of the tone of these minutes, and even with the improved data and financial conditions since last meeting, we believe it is quite likely the Fed will undertake some action at the next meeting in mid-September,” J.P. Morgan economist Michael Feroli wrote in a note.

On Thursday, there is also housing data - new home sales and FHFA home prices are both reported at 10 a.m.

Earnings are expected from Diageo, Gold Fields Ltd, Hormel Foods, Royal Ahold, Big Lots and Patterson Cos, before the open. Salesforce.com reports after the close.

Follow Patti Domm on Twitter: @pattidomm

Questions? Comments? Email us at marketinsider@cnbc.com

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.