MarketView for December 17

Summary  

It was a bit of a down day on Wall Street on Tuesday; with investors holding back before the results of the Tuesday through Wednesday Federal Reserve meeting that could give some clarity as to when the Fed might begin reducing its monthly stimulus purchases of $85 billion of debt securities.

The policy-setting Federal Open Market Committee is expected to issue a statement on Wednesday at the meeting's conclusion. Although the Fed is not expected to start reducing its purchases until March, recent stronger-than-expected economic data has some on the Street taking the position that tapering could begin as early as this month.

The Fed has said it would begin to slow the program when certain economic indicators meet its targets. Some market participants believe that the Fed will upgrade its economic forecasts in the meeting. Meanwhile, the CBOE Volatility Index, a measure of investor anxiety, rose 1.1 percent to close at 16.21, its highest level since mid-October.

Stocks fluctuated between losses and break-even levels throughout Tuesday's session, briefly dipping to session lows after a two-year U.S. budget deal cleared a Senate procedural vote that all but assured its passage by the Senate as early as Wednesday. The gridlock that led to a partial government shutdown in October was considered a reason for the Fed to hold off on tapering.

Consumer prices were flat in November, but a bounce back in the annual inflation rate from a four-year low will probably give the Fed some room to start the tapering. Separate data showed the current account trade deficit was the smallest in four years in the third quarter as exports increased and more income was earned abroad.

In corporate news, shares of KKR Financial Holdings ended the day up 30.6 percent to $12.34 a day after KKR & Co said it would acquire the company for $2.6 billion. KKR slid 1.2 percent to $24.79.

Facebook was up 2 percent to $54.86 after the Wall Street Journal reported that the social network would begin selling video ads later this week. Shares of 3M rose 2.9 percent to $131.39 after the company reaffirmed its outlook and raised its dividend.

Boeing's board raised the company's dividend about 50 percent on Monday and approved $10 billion in new stock-buyback authority that the company said it would use in the next two to three years. Boeing ended the day up 0.9 percent to close at $135.88.

AT&T said it would sell its wire line operations in Connecticut to Frontier Communications for $2 billion in cash, partly to fund the expansion of its 4G network. Frontier's shares were up 8.6 percent to $4.78 and ranked as the S&P 500's largest percentage gainer. AT&T fell 0.9 percent to end the day at $33.85.

Jabil Circuit fell 4.8 percent to $18.72 in extended-hours trading after the company reported its second-quarter results. The stock had ended regular trading at $19.72, up 0.2 percent.

Approximately 5.06 billion shares changed hands on the major equity exchanges according to BATS exchange data.

Consumer Prices Unchanged

A report released by the Labor Department on Tuesday morning indicated that consumer prices were unchanged during November. According to the Department, its Consumer Price Index was restrained last month by declines in gasoline and natural gas prices, after slipping 0.1 percent in October.

In the 12 months through November, the CPI rose 1.2 percent. It had increased 1.0 percent in October, the smallest advance since October 2009. Removing the volatile energy and food components, the so-called core CPI rose 0.2 percent after rising by 0.1 percent for three consecutive months. That took the increase over the past 12 months to 1.7 percent, rising by the same margin for a third straight month.

The Fed targets 2 percent inflation, although it tracks a gauge that tends to run a bit below the CPI. The inflation report was released as Fed officials were due to start a two-day meeting to assess the economy and deliberate on monetary policy.

Though some Fed officials are concerned about inflation being too low, that will probably not stop the Fed from reducing the pace of its monthly bond purchases. Key data including employment, retail sales and industrial production have all pointed to an economy that is on an upswing.

Persistently low inflation would probably serve as a caution to officials and see the Fed keeping interest rates low for a long time even after it begins to reduce its bond purchases.

A 1.6 percent drop in gasoline prices and a 1.8 percent fall in the cost of natural gas offset increases in electricity, keeping inflation subdued last month. Gasoline prices had dropped 2.9 percent in October, while natural gas prices had declined 1.0 percent. Food prices rose 0.1 percent in November after ticking up by the same margin the prior month.

Within the core CPI, apparel prices fell for a third straight month in November, reflecting discounts offered by retailers to lure shoppers and reduce inventory. There were, however, gains in rent, which accounts for about a third of the core CPI. The rent index increased 0.3 percent after gaining 0.1 percent in October.

Owners' equivalent rent of primary residence increased 0.3 percent after rising 0.2 percent in October. Demand of rental housing has been rising with a shift away from owning a home, putting upward pressure on rents. Medical care costs were flat, while prices for new vehicles fell for a second straight month.

Current Account Deficit Falls

A report by the Commerce Department released Tuesday morning indicated that the third quarter current account trade deficit was the smallest in four years as exports increased and more income was earned abroad. The Commerce Department said the current account gap, which measures the flow of goods, services and investments into and out of the country, narrowed to $94.8 billion.

That was the smallest since the third quarter of 2009 and was an improvement from a revised shortfall of $96.6 billion in the second quarter. It also represented 2.2 percent of gross domestic product, the smallest share since the first quarter of 1998 and down from 2.3 percent in the July-September period.

The shortfall on the current account has shrunk from a peak of 6.2 percent of GDP in the fourth quarter of 2005, in part because of a significant increase in the volume of oil exports. During the third quarter, exports of goods and services increased 0.6 percent to $765.1 billion, while imports rose 0.4 percent. The surplus on income increased to $60.0 billion from $56.0 billion in the second quarter. Net unilateral transfers decreased to $34.1 billion from $34.5 billion.