Will It or Won't It? Market Watches Fed for Signs of Action

When it comes to central bankers, the market is hoping to see doves on both sides of the Atlantic.

United States Federal Reserve
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United States Federal Reserve

Markets may close out the month of July on a quiet note, ahead of the Fed’s Wednesday afternoon statement and the European Central Bank’s meeting Thursday.

The Fed starts its two-day meeting Tuesday, and there is anticipation it could take action, including another round of quantitative easing. However, most Fed watchers do not expect the Fed to announce a third quantitative easing program yet, but it could lay the groundwork for easing in September. Some of the other actions it could take Wednesday include extending the time frame for extremely low interest rates to mid-2015 from 2014.

Stocks finished slightly lower Tuesday, after moving in a fairly narrow range most of the day. The biggest mover was Nasdaq, down 12 points at 2945. The Dow fell 2 points to 13,073, and the S&P 500 was down less than a point at 1385. For the month, the Dow is up 1.5 percent, the S&P 500 is up 1.7 percent and the Nasdaq is up 0.4 percent.

Treasury yields fell and the 10-year slipped to 1.4985 percent.

Further easing could be aimed at the mortgage market, if the Fed chooses to do another round of asset purchases. It is currently conducting Operation Twist, a program under which it buys longer dated Treasurys and sells an equal number at the short end, which keeps its balance sheet size steady, unlike QE.

“We’re just waiting for the central bank actions,” said John Briggs, senior Treasury strategist at RBS. “After the relief trade last week, we’re just treading water.”

Briggs said, however, that the markets could have a stronger reaction to the ECB this week than the Fed. ECB President Mario Draghi ignited a risk rally Thursday when he said he ECB would do whatever it takes to preserve the euro. Draghi’s remarks were backed by the leaders of Germany and France, who issued a joint statement Friday, and they were reinforced again by German Finance Minister Wolfgang Schaeuble Monday.

Schaeuble met with U.S. Treasury Secretary Tim Geithner, and the two issued a statement, emphasizing the “need for ongoing international cooperation and coordination” and said the U.S. and Germany would continue to cooperate and work with partners on policy changes to stabilize the world and European economies. Geithner was also to meet with Draghi.

The ECB is reportedly studying a range of actions, including giving the permanent bailout fund bank powers. “I think there’s more room for disappointment out of the ECB than out of the Fed,” said Briggs. “Are they going to follow through? I think that is the biggest risk for the markets for the week.”

Briggs said the markets will quickly look beyond the Fed Wednesday afternoon to the ECB. Depending on what the Fed does, “I think the move will be more muted than it might otherwise be until we see Draghi,” he said.

As investors await the Fed, there is some economic data Tuesday. Personal income and spending are released at 8:30 a.m. ET. The employment cost index is also released at 8:30 a.m., and S&P/Case-Shiller home price data is expected at 9 a.m. Consumer confidence is at 10 a.m. and Chicago PMI is released at 9:45 a.m.

There are some major earnings reportsexpected from Anheuser-Busch Inbev , BP , Pfizer , Deustche Bank, Aetna, Honda, Cummins, Valero, Thomson Reuters and UBS , ahead of the opening bell. Late day reports are expected from DreamWorks, Papa John’s, Allstate, Electronics Arts , Genworth and Oneok.

So far, 67 percent of the S&P 500 companies reporting earnings have beaten estimates for the bottom line, but some 60 percent missed revenue forecasts, according to Thomson Reuters.

“We’re still pretty skeptical about the rally,” said Andrew Burkly, equity strategist at Brown Brothers Harriman. “ We think resistance at (S&P) 1390 to 1400 will be tough to overcome.”

Burkly said he sees downside of 1300 to 1320 over the next eight weeks. “We still think we’re in this sort of soft patch. Earnings are okay. Revenues are not great, and valuation is good. But overall, we don’t see a whole lot of firepower,” he said.

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