Market Insider

Tuesday Look Ahead: Fed Day Could be Positive for Stocks

The Fed is unlikely to make any changes to its easy money policy for now, and that could be a positive for stocks.

Wall Street sign

Economists say the Fed will hold its target Fed funds rate at 0 to 0.25 percent, and many also expect it to retain a key phrase in its statement that it will keep rates extremely low for an "extended period."

"More baby steps," said Pimco strategist and portfolio manager Tony Crescenzi.

"The Fed's strategy is to keep it a process, not an event. That's the way to keep the market responses as small as possible. They don't want some deleterious effect. They don't want a tightening of financial conditions. They don't want to exacerbate any conditions in financial markets that might occur after QE (quantitative easing) ends," he said.

If recent history is a guide, there's a good chance stocks will close higher after the FOMC's Tuesday meeting. Traders look at the Fed's extremely low rate policy as the juice behind the stock market's more than 60 percent move since March, 2009.

Birinyi Associates, in a note, examined the market reaction on each of the Fed's rate decision days since the beginning of 2008. The S&P 500 was up 76 percent of the time. But after six of the last seven meetings, stocks moved off their highs after the Fed's 2:15 p.m. statement, even when they finished higher on the day.

Crescenzi said the Fed will wait until April or later before making any big moves. "By the April meeting, there will be another payroll report in hand to see if it is justified. The sense is when they make changes, it will move from 'extended period' to 'some time.' We've seen four Fed presidents so far say 'some time,'" he said.

"When they say 'extended period,' we don't expect them to move for at least six months. 'Some time' says it may be less than six months. There are many people who believe 'extended period' will come out tomorrow," he said.

Boris Schlossberg of GFT Forex is one of those.

"If they don't, there will be a lot of disappointment and the dollar (rally) will die. If we have a complete duplicate of last month's statement, it will be disappointing to the market because the market feels the U.S. has turned the corner," Schlossberg said.

Crescenzi said there may be more dissenters among FOMC members this time when the Fed meets. At the last meeting, Kansas City Fed President Thomas Hoenig was the lone hawk. This time, he may be joined by another president, possibly St. Louis Fed President James Bullard.

The Fed heads into its meeting just as one of its quantitative easing programs is about to lapse at the end of the month. The Fed has preannounced the end of its purchases of mortgages, which traders say has helped keep mortgage rates low. There was some speculation that mortgage rates would rise as the Fed pulled back from the program, but so far spreads remain tight.

"That's the one dog that didn't bark," said Richard Hoey, chief economist at BNY Mellon. "It wouldn't be unrealistic to expect widening, some concern to show up."

"The market has been told it's happening and the market tends to be a discounting mechanism. You could have some impact but there's kind of a debate between those people who think it's a modest impact and those who it it's huge," he said.

"Any time you hear an argument that widely anticipated news should have the following affect...if it's widely anticipated, why isn't it built in," he said.

Besides the Fed, other market news of note includes housing starts, building permits and import/export prices at 8:30 a.m.

EU finance ministers meet in Brussels and Greece is certainly on the agenda. In Washington, Treasury Secretary Tim Geithner testifies before the House Appropriations committee on the budget and economic outlook.

Stocks on Monday were mixed, with the Dow and S&P 500 finishing slightly higher. The S&P was up less than a point at the 1150, and the Dow was up 17 at 10,642. Nasdaq was down 5 at 2362.  Financial stocks, down 0.08 percent, came off their lows after Sen. Christopher Dodd, D-Conn. released his financial regulatory reform bill.

"There's more headline risk than legislative risk," said one trader, who said the bill is a long way from its approved form and it contained no major surprises.

Schlossberg said the pound and euro weakened Monday, in part as Moody's cautioned about the threat of heavy debt burdens to the ratings of developed nations, like the U.S., Germany, France and the U.K. Investors are also watching increasing rhetoric between the U.S. and China over whether China's currency is undervalued, thereby giving it an unfair trade advantage.

Chinese Premier Wen Jiabao Sunday rejected claims that the yuan is undervalued and suggested the U.S. effort to boost exports by weakening the dollar amounts to trade protectionism. On Monday, the House Ways and Means committee announced it would hold a full day hearing on China's exchange rate policy and its impact on the U.S. and global economies next Wednesday.

"The other story that's blowing up is the yuan evaluation. It's not so much that they are doing this to stick our noses in the mud. They genuinely believe the global economy is still fragile and they want to see that the U.S. economy is a second pillar of growth," said Schlossberg. "Then they will feel more comfortable about letting the yuan move higher. They are just trying to walk a fine line economically."

Schlossberg said China may act in three to six months, but it will wait to see if the U.S. generates job growth. "Politics always trumps economics.. That is a danger point....You certainly don't want to create unnecessary friction just at the point of global economic recovery," he said.

"They basically rescued the world from complete and total collapse last year by being the only source of growth for the whole world. You have to give them credit for that,"he said.

China, meanwhile, continued reducing its holdings in U.S.Treasurys in January, but it remains the largest foreign holder of U.S. debt. The latest Treasury International Capital report, released Monday, showed China was a net seller of Treasurys in January, reducing its holdings by $5.8 billion to $889 billion. In December, it had net sales of over $34 billion.

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