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MarketView
Events defining the day's trading activity on Wall Street
Lauren Rudd
Wednesday, January 11, 2012
Summary
It was an uneventful day in terms of trading
activity with the key reason being that investors are waiting to see how the upcoming Thursday and
Friday bond offerings in Europe from Italy and Spain, two countries at
the center of the euro zone crisis, will play out. Meanwhile, the correlation between the our markets
and those in Europe is waning somewhat with investors concentrating more
on our improving economic data and the investment opportunities being
afforded us by ever increasing corporate earnings. Further
reflecting the weakening link between the euro zone and stock market,
the 50-day correlation between the S&P 500 e-mini futures contract and
the euro crossed the zero line this week after four months of being in
positive territory, indicating they were no longer on the same path. Wall Street did recover from early losses on
Wednesday brought on by a warning from Fitch of severe repercussions,
including a possible collapse of the euro, without more supportive
action by the European Central Bank. The Fitch news sent the euro to its
lowest level in 16 months against the dollar, which would normally have
spelled steeper losses for stocks. Materials shares moved higher, due in large part to
U.S. Steel, which ended the day up 4.7 percent to close at $28.56, after
Credit Suisse upgraded fellow metals company AK Steel to an "outperform"
rating. Chevron fell 2.3 percent to $105.35 in extended
trade after the country’s second largest oil company gave its
fourth-quarter outlook. Supervalu fell 12.5 percent to $7.34 after
quarterly sales at the third-largest U.S. supermarket chain missed
estimates. Urban Outfitters, facing declining margins, said its
chief executive resigned unexpectedly, sending the company's shares down
18.6 percent to $23.93. Crocs shares ended the day up 16.4 percent to $18.56
after the shoemaker said it expects fourth-quarter revenue to be at the
high end of its earlier estimate, becoming the latest footwear company
to flag strong sales numbers for the holiday season. Volume was modest with about 6.65 billion shares
changing hands on the three major equity exchanges, almost even with the
daily average of 6.7 billion shares.
Fed Bickering Continues Top Federal Reserve officials continued to bicker in
public on Wednesday over how aggressive the central bank should be to
spur faster growth and bring a lofty jobless rate down more quickly. For
example, Chicago Fed President Charles Evans said he favors the Fed
strengthening its commitment to holding interest rates near zero by
adopting specific thresholds that unemployment and inflation must hit
before interest rates could go up. "The data are not strong enough, or uniform enough,
to assert that momentum for growth is building," he said, suggesting
that he would favor keeping benchmark rates on hold at least through the
mid-2013 date already set. Then you have Philadelphia Fed President Charles
Plosser stating that rates may need to rise sooner than that. He
expressed concern that although inflation has moderated it remains above
levels forecast for 2011 and that policymakers need to be ready to
remove easy money policies. "Inflation most often develops gradually, and if
monetary policy waits too long to respond, it can be very costly to
correct," he said. "We need to proceed with caution as to the degree of
monetary accommodation we supply to the economy." The two officials represent opposing extremes of the
debate at the Fed over how much medicine the economy needs to solidify
its recovery from a deep recession that ended two-and-a-half years ago. In its Beige Book anecdotal review of economic
conditions, the Fed said growth is expanding moderately but a weak jobs
market is holding back income growth, needed to support expansion. The
central bank next meets to discuss monetary policy on January 24-25,
where it is expected to begin making public more details about its
economic forecasts and goals as a way to cement expectations that
policymakers will keep rates low until the recovery is more robust. Evans and Plosser represent the two extremes of Fed
policymaker views on monetary policy, and officials are expected to keep
more aggressive steps in reserve in case the recovery wobbles. The Fed is due to being publishing detailed
forecasts for the path of the benchmark federal funds rate in coming
years at the January meeting. It is also expected to move closer to
committing to an explicit inflation target. Those steps are viewed as
helping cement its promise to hold rates at ultra-low levels through
mid-2013 and possibly beyond. Atlanta Fed Bank President Dennis Lockhart, also
speaking on Wednesday, noted that the housing market, which has weighed
heavily on the economy, remains depressed. He said housing prices were
still falling year over year, suggesting the troubled sector has yet to
see a bottom. Having virtually exhausted conventional tools the
Fed has turned to communications initiatives to help strengthen growth.
Inflation targeting is one such tool. Most other central banks publish
inflation targets as a way of anchoring inflation expectations, and most
Fed officials support an explicit inflation target. However, Fed
officials also disagree on what adopting an explicit inflation target
means for monetary policy. Evans said on Wednesday that setting an inflation
target could allow policymakers to temporarily permit inflation to go
higher than 2 percent -- the Fed's preferred threshold -- to bring the
jobless rate down to an acceptable level. "Even if inflation runs somewhat above its goal for
a while, the public would understand that we intend to bring inflation
down to the goal over time," he said. St. Louis Fed President James Bullard said on
Tuesday the value of an explicit target is that it cements the central
bank's inflation-fighting credibility by committing not to let inflation
surpass a target level. Also, since the Fed has a mandate not only to
maintain price stability but also to ensure full employment, some
officials believe that if the Fed sets inflation targets, it must also
provide similar goals for employment. Evans, for example, advocates making clear the Fed
will hold rates low until the jobless rate slips below 7 percent. However, others disagree. Jeffrey Lacker, president
of the Richmond Fed and an inflation hawk, also touted the benefits of
clear communications on Wednesday in an interview with CNBC, but said it
would not be appropriate for the Fed to set a numerical target for
unemployment. Evans, who has been one of the most outspoken
advocates of Fed action to lower unemployment, said the central bank
should stick to its super-easy monetary policy to fight unemployment and
spur a "painstakingly slow" economic recovery. "There is a natural tendency for policymakers to
pull back on accommodation too early before the real rate of interest
has fallen to low enough levels," he said in an address to a business
group. "It is essential that the Fed clearly commit to a policy action
that is measurable against our goals."
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MarketView for January 11
MarketView for Wednesday, January 11