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How Long Will The Fed Wait?

  • Written by Syndicated Publisher 302 Comments302 Comments Comments
    March 28, 2012

    Stock markets in Asia and Europe had their worst week of the year last week in response to unexpectedly negative economic news from China and the 17-nation eurozone. The U.S. stock market was disappointed and pulled back some last week on reports from the U.S. housing industry that were unexpectedly negative, home sales and new home starts dropping, the inventory of unsold houses spiking up.

    Fed Chairman Bernanke was out with a speech before the market opened yesterday, providing assurance that the Fed is ready to step in with another round of stimulus or QE if it becomes necessary.

    Those words not only put a stopper to any possible follow through from last week’s market decline, but immediately boosted the Dow into a triple-digit gain.

    Additional troublesome economic reports were subsequently released during the morning yesterday.

    It was reported that Pending Home Sales unexpectedly fell 0.5% last month compared to the consensus forecast of an increase of 1.0%, suggesting the next monthly report on home sales will also be weak. The Fed’s Dallas area Business Activity Index was a big negative miss, declining from 17.8 in February to 10.8 in March, widely missing the consensus forecast that it would remain strong at 17.0. And perhaps most disappointing, the Chicago Fed National Activity Index, designed to gauge economic activity nationally, fell back into negative territory for the first time in four months, coming is at –0.09 in February from +0.33 in January.

    Unlike last week, the U.S. market moved higher after those negative reports, apparently liking the additional bad news because it may force the Fed to come to the rescue sooner.

    And indeed, if rescue is needed the Fed will want to act sooner rather than  later this year since it is an election year. Fed chairmen are always reluctant to have the Fed act too close to elections on concern the action will be construed as being politically motivated. So they can’t wait beyond July if economic reports continue to deteriorate to any degree at all. If they don’t act by then it will be difficult to act later if any slowdown worsens perceptibly later in the year.

    Which upcoming reports will be most important to the Fed, likely to trigger a move?

    Chairman Bernanke’s speech provided a strong clue that the jobs picture will be the deciding factor. He said lingering high unemployment was a major concern, and cautioned that the recent strength in employment was suspect, or as he put it “somewhat of a puzzle”. He pointed out that it normally takes GDP growth of 4% to lower the unemployment rate as much in a year as it has fallen over the last 12 months. And actual U.S. GDP growth was just 1.7%, less than half of that.

    But unless the jobs numbers unexpectedly deteriorate don’t expect the Fed to move until July, especially if it can get positive responses like yesterday’s from mere words, which don’t cost anything.

    A Positive Last Week of March Would be Against the Odds?

    There was an interesting article late yesterday on Yahoo Finance.

    It began by saying that if the market is still up by Friday it will be against its inclinations of the last 20 years. It points out that the final week of the 1st quarter tends to be a down week, only up six years since 1992. And in the 14 years it was down it was down an average of 1.47%, while in the six years it was up the gain averaged only 0.6%.

    That’s quite a negative bias.


    To read my weekend newspaper column ‘Here We Go Again Already?’ Click here.

    Images: Flickr (licence attribution)

    About The Author

    Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily Internet blog at www.SyHardingblog.com. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!