Monday, 21 September 2009
Fed call on state of recovery could send Wall Street soaring
Stocks in the United States could extend their rally and the Dow Jones Industrial Average could climb above 10,000 points should the Federal Reserve’s policymakers and economic data support the view that the economy is recovering from recession.
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Fed call on state of recovery could send Wall Street soaring
Key economic data will also provide guidance for investors
Reuters in New York
21 September 2009
Stocks in the United States could extend their rally and the Dow Jones Industrial Average could climb above 10,000 points should the Federal Reserve’s policymakers and economic data support the view that the economy is recovering from recession.
The Federal Open Market Committee will meet tomorrow and on Wednesday, and investors will anxiously await the policymakers’ assessment of whether the US economy is improving.
The week’s key economic data will include US existing home sales, a report on new orders of durable goods such as washing machines and refrigerators, new home sales, and a final reading for this month on consumer sentiment - all likely to put expectations for recovery to the test.
The Standard & Poor’s 500 Index has climbed from a 12-year closing low, rising 58 per cent over the past six months. The rally has fed on expectations of a rebound from recession, coupled with cheap money that has flooded almost every market.
“The market has obviously had a nice run with a combination of hopes for second-half recovery and a very easy Fed policy,” said Peter Boockvar, an equity strategist at Miller Tabak.
This week, the Fed is expected to acknowledge a batch of recent economic data pointing to a fledgling recovery. The FOMC’s policy statement, due Wednesday evening at the end of the two-day meeting, will come about a week after Fed chairman Ben Bernanke’s comments that the US recession was “very likely” over.
But Bernanke also said the recovery would be slow and it would take time to create new jobs.
“We’re seeing investors that were really direly pessimistic move the metre to slightly more optimistic, and that is confirmed with each little piece of economic data,” said Fred Dickson, a market strategist at D.A. Davidson.
That optimism has translated into an extension of the rally in stocks. For the past week, the Dow rose 2.24 per cent, capping its best week in two months. The S&P 500 Index gained 2.45 per cent and the Nasdaq Composite Index added 2.5 per cent.
Investors are wondering whether interest rates will remain at record lows for some time and whether the economic recovery will stay on track.
“We get both those questions answered partially [this] week,” Boockvar said, referring to the FOMC meeting and key data including the index of leading US economic indicators and durable goods.
Central banks around the world have begun debating how - and more importantly when - to phase out the emergency steps governments have taken to contain the worst global financial crisis in decades. Most are not expected to do so until well into next year.
The Fed has “already announced they’re going to halt the purchases of Treasuries,” Boockvar said.
“The real exit strategy is [normalising] the Fed funds rate, and they are not close to doing that.”
A Reuters poll released last week showed economists expect the Fed to hold rates steady until the third quarter of next year. It also showed expectations the US economy will make a more robust recovery from recession than expected a month ago.
The market is expecting a very sharp rebound from the recession, said John Praveen, the chief strategist at Prudential International Investments Advisers. He said people would closely watch the Fed’s take on what comes for the economy after the rebound.
The Fed and other central banks’ strategies also will be part of the discussion during a two-day Group of 20 summit in Pittsburgh starting on Thursday.
Bankers’ pay and other financial regulations will also be examined.
On the macro front, the main event is set for Friday with the release of August durable goods orders, forecast to rise 0.5 per cent, according to a poll of economists.
“The new orders component of the ISM survey has been very strong,” Praveen said. “People are looking for validation [of the improved sentiment] in the durable goods data.”
Sales data on existing or used homes, due on Thursday, is expected to show a rise to an annual rate of 5.35 million units in August, from July’s 5.24 million units, according to the poll. New home sales data for August, due on Friday, is expected to show an increase to an annual rate of about 440,000 units from July’s 433,000 units.
Stronger home sales will be viewed as an expected continuation of the improvement in the housing market, Praveen said.
Today the Conference Board, a private research group based in New York, will release its index of leading indicators for August. Economists expect a 0.7 per cent increase, compared with a previous gain of 0.6 per cent.
The last week of the third quarter could also see fund managers starting to shift their asset allocations, which could further boost the market. “Let’s be ready for quarter-end asset allocation moves - from cash and bonds to equities,” said Dickson.
This week’s highlights will include quarterly scorecards from ConAgra Foods, Bed Bath & Beyond, General Mills, Rite Aid Corp and KB Home.
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