One of the big questions hanging over markets should be answered in the coming week, and that is where the Fed stands on further easing on interest rates.
Most Fed watchers do not expect any further extraordinary policy measures to come out of the Fed's one day-meeting Tuesday, but it is being closely watched by investors hoping to see if the Fed will tip its hand on when it might act (See more on page 3). With the target Fed funds rate at zero, the Fed has little leverage to push lending rates lower, but one method it would consider using is quantitative easing (QE), or the outright purchase of Treasurys or other securities.
"I don't think we're going to see QE2. I think the data since the last meeting has been kind of muddling along. It hasn't decelerated enough for them to consider additional quantitative easing," said John Briggs, Treasury strategist at RBS.
Housing data dominates the week's economic calendar, and there are also durable goods and the usual weekly jobless claims. There are also a few earnings reports from Nike, Adobe, Darden Restaurants, General Mills, KB Homes, and Carnival.
President Obama heads to the United Nations General Assembly with other world leaders, but on Monday, he will be taking time out to participate in a special town hall event on CNBC during the middle of the market day. CNBC will air the hour-long town hall in its entirety at noon, and Obama will take questions on the economy from investors and business leaders.
"I think maybe it's too little, too late, but I think the current Administration, in a wise move, is finally trying to show they do have a pro business side," said Art Hogan, managing director at Jefferies.
"The only thing that really, really could upset the apple cart is if he draws a very hard line on the tax cut issue," said Hogan.
"The only thing that really, really could upset the apple cart is if [Obama] draws a very hard line on the tax cut issue."
Stocks were higher for the third week, and the S&P 500 has now scored a gain of more than 7 percent for the month, which would be its third best September performance ever if it holds. The Dow gained 1.4 percent this past week to finish at 10,607. The S&P was up 1.5 percent at 1125, and the Nasdaq was up 3.3 percent of the week at 2315. For the quarter to date so far, the Dow is up 8.5 percent and the S&P is up 9.2 percent.
While stocks rose on low volume in the past week, the excitement was in the foreign exchange and gold markets. The Bank of Japan intervened to stop the yen's surge, and the dollar finished the week 2 percent higher against the currency. The dollar was 2.5 percent lower against the euro for the week.
Gold was the standout. It gained 2.5 percent for the week and settled Friday at a record $1,275.60 per troy ounce.
Barclay's Capital's Suki Cooper said she expects the price to keep rising. "In a pure supply and demand basis, as a commodity, ..prices aren't very well supported, but as a currency the factors behind it are very strong," she said. For the third quarter, she expects the average price to be $1,215 per ounce.
"We had expected gold to set highs in the fourth quarter," she said. For the fourth quarter, she expects an average price of $1,260 and in the first quarter of 2011, she sees an average price of $1,300.
"The world got overly pessimistic."
Economics and Politics
The stock market's September performance continues to surprise strategists, who had expected a rough month for stocks. They point to two positive factors -- economic data that did not support the idea of a double dip and a clearer view of how Congress might be reshaped as the mid-term election approaches.
"In my view, the world got overly pessimistic. Our struggle was July and August when the market chatter was a lot worse than the company conversations. The information, the economic statistics, have come in 'less bad' than feared, not good, and 'less bad' than feared is necessary to lift the market," said BlackRock vice chairman Robert Doll.
"We're still going to get some weak economic data. It's not like it was all bad in July and August and smooth sailing for the rest of the year. We're going to bounce around," he said.
"It's not because the market loves Republicans, but the market wants a more divided government."
Doll said the market's view is now that the Democrats will lose the House but hold onto the Senate. If there's a surprise, and Democrats lose both houses in November, the market reaction would be more positive. If they retain both, the reaction would be negative.
"Part of the market doing better is the belief that we're going to have a more divided government," he said.
"It's not because the market loves Republicans, but the market wants a more divided government. The Congress we are likely to see in January would in no way, shape or form pass the health care or financial reform passed by the current Congress," he said. "..To most investors, doing nothing is better than the actions we've seen in the last 12 months."
Doll thinks there is an increasing chance that the Democrat majority will retain all of the Bush tax cuts, despite the fact that the Administration has said they would be eliminated for the wealthiest tax payers, earning more than $250,000. Obama recently raised the idea of tax incentives for business investment.
"I think he was trying to change the dialogue from the Democratic party taking all the blame, by proposing some things the Republicans had liked," Doll said.
Doll does not expect Obama to say much new at the town hall event. "I think he's trying to cut his losses, and I think reaching out and being vocal and trying to get out in front of as many people as he can and constituents that he can is smart at this juncture," he said. "I don't think there's anything particularly new that he will say, but he wants to make his case. There's probably a correlation here too—as the polls got worse, the market got better."
Hogan said once the Fed meeting is out of the way, the the markets' main focus will be on the economic data. But the political season will also play a role.
"I think it's a point in time where we're going to have a wild card of an election cycle. If you look at one of the biggest concerns the markets had and corporate America had is fiscal policy and tax cuts being moved forward, or extending the tax cuts. That's the biggest political football," he said.
Can the Fed form a consensus?
Economists say a well-publicized split in opinion among Fed members also cast doubt on the possibility of any move toward easing this time around. "Part of the reason why there's no consensus to do it is there is still a debate on how the economy is going to perform," said Deutsche Bank chief U.S. economist Joseph LaVorgna.
The Wall Street Journal, ahead of the release of minutes of the Fed's Aug. 10 meeting, reported in unusual detail about how seven of 17 Fed members either objected to or had reservations about further easing. The Fed had decided at that meeting to purchase a limited amount of Treasury securities, only to replace maturing mortgage securities on its balance sheet in a bid to keep the size of its balance sheet stable.
Goldman Sachs economists have said they believe the Fed could ultimately announce a new QE program (or QE2) to buy $1 trillion in Treasury securities, but that would probably not happen until the end of the year or early next year.
"I think they ultimately need to do it. I think just for the simple reason that an unemployment rate near 10 percent that is not clearly improving is unacceptable, and clearly some of that high unemployment is cyclical rather than structural," said Goldman Sachs economist Andrew Tilton.
"I think the (Fed meeting) statement would reflect the weaker outlook and certainly leave the door open to the possibility of more balance sheet expansion," he said.
Fed Chairman Ben Bernanke will be challenged to bring the Fed to a consensus. "I see this meeting as a regrouping, after the last meeting which didn't go smoothly, and its aftermath was pretty messy. There needs to be some effort to define more common ground within the Federal Reserve or at least be able to express more common ground to the public," said Mesirow Financial chief economist Diane Swonk.
After Bernanke's day of consensus building, he gives a lecture at Princeton University Friday at 4:30 p.m. The topic was not disclosed.
Other Fed speak includes former Fed Chairman Paul Volcker, speaking Thursday at 1 p.m. at the Chicago Fed banking conference. Chicago Fed President Charles Evans speaks there at 10:40 a.m.
On Friday, Fed Gov. Elizabeth Duke speaks at 9 a.m. in Washington on the home mortgage disclosure act. Richmond Fed President Jeffrey Lacker speaks in Frankfort, Ky. on the economy, policy and the financial crisis at 1 p.m., and Philadelphia Fed President Charles Plosser speaks at 2 p.m. ET in Switzerland on monetary policy. Duke is also scheduled to speak in Princeton Friday at 4:30 p.m.
The housing data in the coming week includes the NAHB survey of homebuilders Monday. Housing starts are reported Tuesday; existing home sales are Thursday, and new home sales are Friday. The FHFA home price index is released Wednesday. Other data includes weekly jobless claims and leading indicators Thursday, and durable goods on Friday.
The Treasury will announce its auction schedule Thursday for 2-year, 5-year and 7-year notes in the following week.
Traders also expect a heavy calendar of new corporate debt issues as well. The 38 deals in the past week pushed the monthly total of investment grade corporate issuance to about $70 billion. The best month of the year so far was March, with a total of $91.3 billion. The all-time record was $133.9 billion in the month of May, 2008.
There are a small number of earnings reports to watch in the week ahead. Discover Financial and Lennar report Monday. AutoZone, Carnival, ConAgra, Adobe Systems , Cintas and Darden report Tuesday.
Wednesday's releases are from CarMax, General Mills and Bed, Bath and Beyond .
Rite Aid, Vail Resorts, and Nike report Thursday. KB Home reports Friday.
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