Fed Delivers a Stinger
Last Update: 19-Mar-09 08:56 ET
http://www.briefing.com/GeneralCont...me=Investor&ArticleId=NS20090319085723PageOne
Tuesday's Page One article was entitled "What's Next?" In light of the FOMC announcement yesterday, it would be a germane title once again. Indeed, what is next from the Fed?
The bold move taken by the FOMC to step up purchases of agency mortgage-backed securities and agency debt, and the plan to purchase up to $300 billion of long-term Treasuries in the next six months, was greeted with a sense of enthusiasm by the market.
The reaction was understandable. The Fed's initiatives were a surprise to most participants and they had a "we mean business" feel to them.
The Treasury purchase plan led to a huge rally in the Treasury market, with the yield on the 10-yr note falling as much as 50 basis points. The Fed is taking aim in particular at driving down market rates to help spur demand for mortgage financing for both purchase loans and refinancing.
Lower rates will be a consequence of the Fed's actions. It is the potential unintended consequences, though, that create some concern when contemplating the longer-term outlook.
The Fed runs a heightened risk of inflating the Treasury market bubble and stoking inflation itself. What's more is that the Fed has made its job of managing monetary policy that much more difficult when economic evidence suggests we are emerging from the financial crisis and the recession.
There is an adage that you shouldn't fight the Fed. Up until now, the stock market has been doing just that -- fighting the Fed and winning in most instances.
We don't know if what the Fed announced yesterday is the knockout punch. It is certainly a stinger, but if it isn't the difference maker, we can't help but wonder with some concern, what's next?
In terms of the stock market, what's next is the fight to clear a key technical hurdle at its 50-day simple moving average, which we alluded to yesterday. Notably, the post-FOMC rally fizzled out at that level (~800), yet the market still managed to end Wednesday with a nice gain.
Today the enthusiasm has been tempered by a weak earnings report from FedEx (FDX), which offset a decent report from Oracle (ORCL), inflation concerns that are manifesting themselves in rising gold and oil prices, and an initial claims report that can still only be described as weak.
Weekly initial claims dipped 12,000 to 646,000, which was better than the consensus estimate of 655,000. The four-week moving average rose by 3,750 to 654,750. Continuing claims hit another record high, jumping to 5.473 million from 5.288 million.
The relatively good news for initial claims is that the trend isn't worsening to a new meaningful degree. It is holding pretty steady around the 650K mark. Still, that condition, and the continued increase in continuing claims, makes it clear that the labor market is weak and that finding a new job in a short amount of time is very challenging.
As of this posting, the market is indicated to open the session about 0.4% higher.
