Speculation about the Fed's next steps swirled through financial markets Tuesday and could continue to be a factor until the Fed meets next week.
The debate in markets is whether the Fed will expand its purchase of Treasurys and when, and what it will have to see in the economy to make that decision.
Wednesday's markets will be keying in on several economic reports, including the Empire State survey, which economists are watching to see if it reflects some of the same weakness seen in regional Fed surveys last month. The survey is reported at 8:30 a.m., as are import prices. Industrial production is released at 9:15 a.m.
Stocks turned in a mixed performance Tuesday, even as August's retail sales report showed a slightly stronger-than-expected gain of 0.4 percent. The Dow was down 17 at 10,526; the S&Pslipped less than a point to 1121, and the Nasdaq was up by 4 points at 2289. A deep dip in Germany's ZEW index of economic expectations had earlier sent a chill across equities markets, as did a flat reading on euro zone industrial production.
The euro, however, made a sharp move higher as concerns that the Fed would embark on a larger quantitative easing program weighed on the dollar, pushed gold prices to a record high and sent buyers into the bond market.
The yen, meanwhile, pulled back from 15-year high against the dollar after Japan confirmed that it intervened in the forex market for the first time in six years. The dollar spiked above 85.00 yen on the news.
The topic of quantitative easing is so sensitive in the markets that a week-old call by Goldman Sachs that the Fed could buy a trillion dollars more in Treasurys was treated as new information by some traders. The Goldman call was reported by the Wall Street Journal, which added fuel to the chatter. Goldman economists have said they don't believe the Fed will take action at its Sept. 21 meeting, but will wait until November or December.
"Sometimes the rumors that capture the market's imagination tell you more about market sentiment," said Marc Chandler, chief currency strategist at Brown Brothers Harriman.
The euro gained 1 percent against the dollar, trading at $1.3008. "It's a big move, but other things don't add up. Interest rates in Europe are still widening out. To see the euro rallying so much in the face of further deterioration in sentiment in Europe is surprising," he said.
"I think the technicals are supportive. But I think the thing I have been focusing on is the 2-year interest rate differential between the U.S. and Germany. It's been tracking the euro/dollar very well but it's had a big move in the last couple of days in Germany's favor, which is dollar negative," he said.
Chandler said the foreign exchange market has been ignoring the improvement in some U.S. data, such as trade, ISM manufacturing, inventories and retail sales. "For the last week or so we had a string of data that suggested Q3 GDP now won't be as weak as Q2, but still the dollar can't get any traction," Chandler said.
Gold's move was among the biggest surprises Tuesday. It jumped 2 percent to $1,272.20 per ounce. "The gold rally had a lot of technical things going for it. It wasn't a blow off top," said John Kilduff, a partner with Again Capital. He said $1,263 was a key technical level, and the settlement above it was a bullish signal.
"I think this move in gold bears watching. I think it's a sign of caution," said Jack Ablin, CIO of Harris Private Bank. "But you also have to recognize the opportunity cost."
Ablin, like many strategist, said he's been surprised by the move up in stocks in September and that it might be time for longer term investors to add to holdings. "I think what it's going to allow us to do is increase the size of our long-term allocation, but we may want to stay relatively defensive shorter term," he said.
"I think right now, it's just day-to-day reality versus perception, where we started the month with investor sentiment as poor as it was. Expectations were rock bottom, so anything better than Armageddon should surprise the market to the positive side," he said.
What Else to Watch
Treasury Secretary Tim Geithner testifies in the second day of hearings by the House Ways and Means Committee on China's currency policies at 10:30 a.m..
Former Fed Chairman Alan Greenspan speaks before the Council on Foreign Relations at 8 a.m.
The World Trade Organization is expected to release its preliminary ruling on an EU complaint about U.S. state aid to Boeing.
Credit card companies release monthly Master trust data on defaults and delinquencies.
Investors will also be considering the outcome of primary votes in a half dozen East Coast states, Wisconsin and Washington D.C.
Bank of America Merrill Lynch released its global fund managers' survey Tuesday, which found a marked decline in bearishness on the Chinese economy. Interestingly, In August, a net 19 percent said the Chinese economy would weaken over the next year, down from 39 percent in July. Eleven percent see the economy strengthening over the next 12 months. The decline in bearish sentiment was the biggest change since May, 2009.
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