MarketView for August 12

Summary

Monday saw the Dow Jones Industrial Average and the S&P 500 indexes ended the day lower, thereby extending losses from last week, but Apple and BlackBerry kept the Nasdaq index afloat. Last week was Wall Street's worst week since June

Trading volume was light, marking one of the five days this year with fewer than 5 billion shares traded over a full session. Many traders are away on holiday in August, amplifying market swings, and the earnings period is drawing to a close as the market enters a seasonally slow period.

Fed stimulus has helped fuel the S&P's gain of nearly 19 percent in 2013. The Fed is seen as moving toward reducing its$85 billion in monthly bond purchases, causing some investors to take a step back from stocks. Some Fed officials have said the Fed could begin scaling back its quantitative easing next month if the economy continues to improve.

BlackBerry rose 10.5 percent to $10.78 after the company said it had set up a committee to explore a possible sale or partnership. The stock was the most actively traded on Nasdaq on Monday.

Shares of Apple rose 2.8 percent to $467.36 after technology blog AllThingsD reported the company is expected to present its redesigned iPhone in September.

Steinway Musical Instruments said it received a $38-per-share buyout offer from an investment firm it did not identify, thereby exceeding an earlier bid by Kohlberg & Co. Shares of Steinway rose 9.3 percent to end the day at $39.59.

Vical ended the day down 57 percent to $1.53 after the company said it would stop developing cancer therapy Allovectin after a late-stage trial failed. The stock was one of the most actively traded on the Nasdaq Stock Market.

Tesla Motors fell 3.7 percent to close at $147.38 after Lazard downgraded the stock.

Other decliners were commercial real estate companies including Prologis down 1.6 percent at $37.68 and BRE Properties, down 0.9 percent at $50.27.

Approximately 4.9 billion shares changed hands on the three major equity exchanges, a number that was well below the average daily closing volume of about 6.36 billion shares this year.

$98 Billion Budget Deficit for July

The United States ran a budget deficit in July, although government revenues increased from a year earlier due to tax hikes and a strengthening economy, a report from the Treasury showed on Monday. The Federal government spent $98 billion more than it took in last month, with the deficit driven by spending on healthcare programs, pensions for the elderly and the military.

The United States customarily runs deficits in July as there are few tax deadlines during the month. The country has run full-year budget deficits continuously since 2001, and the amount of red ink has grown immensely since 2009 when a surge in unemployment fueled higher spending on the social safety net. But this year, the deficit appears on track to narrow substantially.

One major reason is that Washington ratcheted austerity efforts by raising tax rates, which has helped tax receipts. It has also slashed the federal budget, although in July total spending rose to $298 billion from $254 billion in the same month of 2012.

Another factor that has been leading to a lower deficit is the steam that appears to be gathering in the U.S. economy. That is also lifting tax receipts, which rose to $200 billion in July from $185 billion in July 2012.

So far in the current fiscal year, which began in October, the federal government has run $607 billion into the red, a narrowing from the $974 billion deficit chalked up in the same 10 months of fiscal year 2012.

Some Rates More Important to Fed

More crucial in terms of monetary policy's impact on growth and inflation will be signals from the Fed on when it will start to raise short-term interest rates from their current near-zero level, economists at the San Francisco Fed and the New York Fed wrote in the latest issue of the San Francisco Fed's Economic Letter published on Monday.

The Fed's bond-buying programs have given a moderate boost to the economy, but they would have far less impact without the Fed's simultaneous promise to keep rates low, they showed.

The finding, they said, goes not only for past rounds of quantitative easing, but also for the Fed's current and third round, known as QE3.

"Our analysis suggests that communication about when the Fed will begin to raise the federal funds rate from its near-zero level will be more important than signals about the precise timing of the end of QE3," San Francisco Fed senior economist Vasco Curdia and New York Fed senior economist Andrea Ferrero wrote.

Bond yields surged and stocks tanked in June after Fed Chairman Ben Bernanke said the central bank could begin to pare back its $85 billion in monthly asset purchases later this year, ending in the middle of next year when the unemployment rate is likely to be around 7 percent.

Investors were apparently taken by surprise that the central bank intended to wean markets of its program so soon, Fed officials have since said, expressing their own surprise at the strength of the reaction. The Fed has since moved, with some success, to tamp down the view that reducing the bond-buying does not bring the Fed near to raising rates.

And even the most hawkish policymakers, the ones who most want to end QE3, are at pains to emphasize that ending bond buys does not mean the Fed has backed away from its promise to keep rates low until the unemployment rate falls to at least 6.5 percent, as long as the inflation outlook stays benign.

The research published Monday shows why such a promise is so important.

The Fed's second round of asset purchases, totaling $600 billion, added about 0.13 percentage point to GDP growth and about 0.03 percentage point to inflation, the analysis showed. Without the Fed's promise to keep rates low, the researchers said, QE2 would have added just 0.04 percentage point to GDP and 0.02 percentage point to inflation.

"Forward guidance is essential for quantitative easing to be effective," the economists wrote.

That sentiment is in line with the views of a number of Fed officials who have suggested that the Fed's main policy tool is, and should be, rates rather than bond purchases.