Fed policy discussion: some FOMC members consider higher rates

U.S. stock prices were mixed Wednesday, with big, blue-chip stocks generally a little higher, while smaller stocks, biotechs and social media issues ran into a bit of profit taking after their recent rallies. NASDAQ was essentially flat with Tuesday’s 14-year highs, but the Dow climbed 0.35%, getting back to within 1% of its all-time high. The S&P 500 (+0.25%) flirted with an all-time high before losing momentum in the final half hour of trading.

Small-cap indexes fell 0.4% (Russell 2000) to 0.6% (S&P 600 SmallCaps) on Wednesday, and a number of erstwhile high flyers were either flat with recent peak prices (like Apple) or mildly lower (like Facebook and Tesla). Technology and health care stocks, among the market leaders recently, were flat Wednesday, while stocks in the industrial (+1.0%) and consumer discretionary (+0.5%) sectors tended to be stronger. After the close, Hewlett-Packard reported its first increase in revenues in 3 years, but after-hours traders were not especially impressed (by 1% growth). As with Intel, H-P noted increased demand from notebook and desktop computers, boosting – by some small measure – the case for an upswing in business capital spending.

Stocks appeared to get a late boost from the release of the minutes of the FOMC’s late-July policy meeting. Fed officials stood by their forecasts of stronger economic growth and inflation more in line with the 2% target. Stock investors may have drawn encouragement from the minutes’ appraisal of economic conditions. And apparently they were not terribly bothered by the Fed’s statement that many “participants noted that if convergence toward the (FOMC’s growth and inflation) objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated.”

To a limited degree, bond investors took the Fed’s warning to heart, selling Treasury bonds to their lowest levels in a week. The 5- to 7-year portion of the Treasury curve was weakest, with declines a tick or two worse than the 10-year Treasury’s roughly one-quarter point loss. The 10-year T-note yield climbed 3 basis points to 2.43%; for perspective, we should note that prior to August’s swoon, 2.43% on the benchmark T-note represented the lowest rate since June 2013. With Mario Draghi’s speech to this week’s Jackson Hole symposium approaching, not to mention Janet Yellen’s, European bond yields generally ticked lower on Wednesday, with Spain’s 10-year benchmark yield dipping slightly below U.S. Treasurys.

Stock markets in Europe and Asia were down modestly on average in Wednesday trade. The Europe Dow and the Asia Dow each fell by roughly 0.25%, with no big moves in either direction among major indexes. Investors appeared to be holding buy/sell decisions in abeyance, waiting on either today’s Fed minutes, which were released after foreign markets had closed, or the Yellen/Draghi presentations at the Jackson Hole Conference, which kicks off on Thursday. Generally speaking, U.S. stock indexes have made up for July’s setbacks this month; European markets have not; and most Asian markets sport nice gains so far in Q3.

Commodities prices were generally higher Wednesday, with copper futures up by 2.5%-3%, arresting for the moment what has essentially been a two-month swoon. Crude oil prices also pulled out of a two-month tailspin, with the more heavily traded October WTI futures contract rising 0.6% to $93.45 a barrel. The Energy Information Agency reported a bigger drawdown in crude stocks in the latest week than markets were expecting.

Reports/dates/facts/links to watch for over the next week:

  1. August 21: Weekly unemployment claims; existing home sales (July); U.S. leading economic indicators (July); Philadelphia Fed survey (August).
  2. August 22: Federal Reserve Chairman Janet Yellen speaks on labor markets at K.C. Fed’s annual Jackson Hole symposium; ECB President Mario Draghi is also slated to speak.
  3. August 23: Jackson Hole symposium concludes.
  4. August 25: U.S. new home sales (July); Dallas Fed manufacturing survey (August); Chicago Fed national activity index (July).
  5. August 26: Durables goods orders and shipments (July); Case-Shiller home price indexes (June); Conference Board consumer confidence survey (August).

Copyright © 2014 by Wright Investors’ Service, Inc. The views expressed in this blog reflect those of Wright Investors’ Service, Inc. and are subject to change. Statements and opinions therein are based on sources of information believed to be accurate and reliable, but Wright Investors’ Service, Inc. makes no representations or guarantees as to the accuracy or completeness thereof. These views should not be relied upon as investment advice.

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Senior Vice President – Investment Research/Economist
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