MarketView for August 22

Summary

Two of the three major equity indexes managed to erase the day’s trading losses to close flat on Wednesday after minutes from the latest Federal Reserve meeting indicated the central bank might be ready for another round of stimulus. Stocks had spent most of the session in negative territory after weak export data from Japan and caution over Greece's meetings this week with European Union officials gave investors reasons to pull back after the recent rally.

However, minutes from the July 31-August 1 meeting suggested the Fed is likely to deliver another round of monetary stimulus "fairly soon" unless the economy improves considerably. Therefore, the only question remaining for the markets is whether the recent improvement in economic data, which came after that meeting, will have convinced Fed Chairman Ben Bernanke that no action is necessary.

The Jackson Hole, Wyoming, meeting of central bankers and economists at the end of the month is seen as possibly the next big market catalyst, followed by the European Central Bank's September 6 meeting and the German constitutional court's vote to ratify the euro zone's rescue fund six days later.

Among the most actively traded were Dell, down 5.4 percent at $11.68 a day after the Dell warned of a challenging second half and slashed its full-year earnings outlook. Following on the heels of Dell's results, Hewlett-Packard was down 1.1 percent to $18.99 after the close after posting a third-quarter loss.

Japan's exports slumped the most in six months in July as shipments to Europe and China tumbled, adding to concerns about global demand after a string of dire trade figures from Asia's export engines. Uncertainty also lingered over the effectiveness of Greek Prime Minister Antonis Samaras' attempts to convince other European officials that his country should be given more time to meet targets for deficit cuts.

Toll Brothers rose to $33.68, its highest point since February 2007, after the largest U.S. luxury homebuilder reported a higher quarterly profit and a sharp jump in new orders. At the close, the stock was up 3.8 percent at $33.01. Continuing a string of bullish housing sector data, home re-sales rose in July as low interest rates and a modest improvement in the labor market helped home buying conditions.

Volume was again light with about 5.45 billion changing hands on the three major equity exchanges, a number that was well below the daily average of 6.62 billion shares.

What Could the Fed be Thinking

Minutes from the Fed’s latest meeting suggested the Fed is likely to deliver another round of monetary stimulus "fairly soon" unless the economy improves While the July 31-August 1 meeting occurred before some encouraging economic data, including a stronger-than-expected rise in July payrolls, policymakers were pretty categorical about their dissatisfaction with the outlook, according to the minutes released on Wednesday.

Some officials at the meeting raised concerns about the Fed's large presence in the markets for Treasury and mortgage-backed securities, but others agreed with a staff analysis showing "substantial capacity" for buying new assets.

The Fed held policy steady at the gathering but signaled a renewed readiness to act amid lingering softness in the economy in a statement it issued following the meeting. However, the minutes showed the central bank is actively considering a "flexible" bond-buying program, which suggests it may not announce an upfront amount to purchase, as it did in the past.

Fed officials saw significant risks to an already weak domestic economy, which grew at a sluggish 1.5 percent annual rate in the second quarter. The risks include a worsening of Europe's financial strains and looming budget cuts and tax hikes, which have become commonly known as the fiscal cliff.

U.S. economic data since the meeting has been a bit less gloomy. Although employment growth slowed sharply in the second quarter, it picked up again in July, when the economy created 163,000 jobs. However, the unemployment rate, which is derived from a separate Labor Department survey, rose to 8.3 percent from 8.2 percent in June.

At the last meeting, many Fed officials supported pushing back the likely timing of the eventual first rate hike, but they decided to defer the decision to the Fed's next meeting on September 12-13, when the central bank will release a new round of economic forecasts.

A few central bankers thought it might be a good idea to replace such language with guidance directly linked to economic factors, as has been proposed by Chicago Federal Reserve Bank President Charles Evans.

Officials also debated and tested the possibility of developing a consensus Fed forecast for the economy, and an associated path for monetary policy under a long-standing effort to improve communication on their thinking. They decided to hold a second test in conjunction with September's meeting.

A couple of policymakers favored lowering the rate the Fed pays banks to park their excess reserves at the central bank, currently at 0.25 percent. But several worried that money market funds could run into trouble if their returns are crimped further.

Officials noted the European Central Bank's recent decision to lower its deposit rate to zero offered a chance to learn about possible effects. Similarly, a couple of officials broached the possibility of developing a loan incentive program like the Bank of England's recently minted funding-for-lending program.

The 80 billion pound ($127 billion) project, launched in June by the British central bank and the government, is designed to spur lending by tying banks' access to cheap credit directly to bank lending to households and businesses.

Home Resale Numbers Rise

Home re-sales were up in July, helped by low interest rates and increased hiring although the data still pointed to a slow recovery in housing that will provide only slight support for the economy. Sales of previously owned homes rose 2.3 percent to an annual rate of 4.47 million units, the National Association of Realtors said on Wednesday. The level of sales was just below analysts' expectations of a 4.52 million-unit rate.

The U.S. housing market, in a deep rut since the 2007-09 recessions, has been a bright spot in the economy this year. The NAR said home prices rose last month from a year earlier and fewer homes were sold under distressed conditions - those following foreclosures or in short sales.

While residential construction may give a small boost to the economy this year, home building plays a much smaller economic role than it did before the recession, and a turn for the worse in the broader economy could easily undo housing's fledgling recovery. While interest rates are low, it is still hard for many people to get a mortgage.

The number of existing homes on the market has fallen sharply since last year, though inventory rose slightly in July to 2.4 million homes. That was 1.3 percent higher than in June but 23.8 percent below its year-ago level. At the current pace of sales, the inventory would last 6.4 months.

Distressed home sales - which are often sold at deep discounts - made up 24 percent of sales in July, down from 25 percent in June, the NAR said. The median price for a home resale was $187,300 in July - 9.4 percent higher than in the same month a year earlier.

A separate report showed applications for U.S. home mortgages tumbled last week, with demand for refinancing drying up as mortgage rates jumped to their highest level since late June. The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, fell 7.4 percent in the week ended Aug 17.

Fixed 30-year mortgage rates were up 10 basis points to average 3.86 percent..