MarketView for September 13

 

 

Summary

 

The major equity indexes reached multi-year highs on Thursday after the Federal Reserve announced an aggressive plan to stimulate the economy, encouraging many to move back into the market. The Dow and the S&P 500 both closed at their highest levels since December 2007, while the Nasdaq ended at the highest since November 2000.

 

Major market names were big winners, with Apple ending at an all-time closing high, while Exxon Mobil reached a four-year high. Nearly 600 shares on the New York Stock Exchange and Nasdaq touched 52-week highs on the day. Apple chalked up a gain of 1.97 percent to close at $682.98 on comments that the sales of the new iPhone 5 could double those of the previous model in its first week on the market. Exxon Mobil gained 1.88 percent to $91.23.

 

Total volume had 8.14 billion shares changing hands, the busiest day of trading since June 22 and above last year's daily average of 7.84 billion.

 

In a significant shift in monetary policy, the Fed said it would buy $40 billion of agency mortgage debt per month and pledged to maintain it until the U.S. unemployment rate, currently at 8.1 percent, significantly improves.

 

"The employment situation ... remains a grave concern," Fed Chairman Ben Bernanke said. "While the economy appears to be on a path of moderate recovery, it isn't growing fast enough to make significant progress reducing the unemployment rate."

 

Many on Wall Street had expected the Fed to act, as reflected in the latest run-up in equity prices, but analysts said there were still some who believed that the Fed would wait until after the November presidential election. In an additional move that reflects just how concerned Fed officials are about the economy, officials said they were not likely to raise interest rates from near zero until at least mid-2015. Previously, it had set such guidance at late 2014.

 

Some analysts said with the S&P 500 index up 16 percent since the beginning of the year and stocks' recent advance on hopes for help from central banks, the gains may be an opportunity for investors to pare positions.

 

Economic data showed the number of Americans filing new claims for jobless benefits rose more than expected last week. Wholesale prices rose 1.7 percent in August; the largest gain since June 2009, although core inflation was stable.

 

Fed Brings Out the Big Guns

 

The Federal Reserve launched another aggressive stimulus program on Thursday, stating that it would pump $40 billion into the U.S. economy until it saw a sustained upturn in the weak jobs market. The central bank's decision to tie its controversial bond buying directly to economic conditions was an unprecedented step that marked a big escalation in its efforts to drive U.S. unemployment lower. Stock prices jumped, while gold hit a six-month high as investors braced for higher inflation.

 

Unlike in its two previous bond-buying sprees, the Fed said it would only purchase mortgage-backed debt, hoping in part to unstick a housing sector that Fed Chairman Ben Bernanke called "a missing piston" in the U.S. recovery. Bernanke also dismissed arguments that the Fed was taking a political stance prior to the election, stating that the Fed acted solely because of the dire state of the U.S. labor market.

 

"The employment situation ... remains a grave concern," Bernanke told reporters. "While the economy appears to be on a path of moderate recovery, it isn't growing fast enough to make significant progress reducing the unemployment rate."

 

The economy created just 96,000 jobs last month, less than needed to keep up with population growth. While the unemployment rate edged down to 8.1 percent, it was only because many Americans gave up on the search for work.

 

By buying mortgage-linked debt, the Fed hopes to press mortgage rates lower, helping the housing market and also encouraging investors in MBS to switch into other assets, lowering their yields as well. Those lower borrowing costs should spur more lending and foster faster economic growth, officials believe. U.S. growth cooled in the second quarter to a tepid 1.7 percent annual rate, and forecasters do not see the economy doing much better now.

 

In an additional move, the Fed said it was not likely to raise overnight interest rates from their current near-zero level until at least mid-2015. Previously, it had set such guidance at late 2014. To underscore its resolve, it said it would pursue an easy monetary policy "for a considerable time" even after the economy strengthened.

 

"If the outlook for the labor market does not improve substantially, the committee will continue its purchase of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability," the Fed said in a statement.

 

Asked repeatedly during a post-decision news conference to amplify on that pledge, Bernanke said the Fed wanted to see a convincing improvement in the economy that could deliver sustainable job creation and a gradual decline in unemployment.

 

"There's not a specific number we have in mind, but what we have seen in the last six months isn't it," he said.

 

It is likely that the Fed will eventually buy more than $1 trillion in debt given the open-ended nature of its new policy. Capital Economics estimated purchases could top $1.4 trillion. The plan fueled some nervousness in financial markets over the potential for inflation, even though the Fed would pull back on its buying if the economy strengthened. Bernanke stated explicitly that pushing up prices was not the Fed's intention.

 

The price of gold, a traditional inflation safe haven, hit a six month high, while oil also gained on expectations investors would pile into riskier assets such as commodities and equities. Prices for most U.S. Treasury debt rose, although the 30-year bond fell, reflecting both disappointment that government debt was not on the Fed's purchase list and inflation worries.

 

The decision comes in the face of widespread questions about the likely effectiveness of a further foray into unorthodox monetary policy, including from Romney. The Fed has already bought $2.3 trillion in U.S. government and housing-related debt it two rounds of so-called quantitative easing. Those programs, dubbed QE1 and QE2, bought bonds closer to a pace around $100 billion per month.

 

In its statement, the Fed said the fresh MBS purchases, which it will start on Friday, would come on top of its so-called Operation Twist program, in which it is selling short-term bonds to buy longer-term Treasury debt. With its new MBS purchases, the Fed said it would now be buying about $85 billion in long-term securities each month.

 

In a reflection of optimism over their new policy path, officials lowered their forecast for the unemployment rate at the end of 2014 to a 6.7 percent to 7.3 percent range, down from a range of 7.0 percent to 7.7 percent in June. Still, even in 2015, they believe the jobless rate will be above the 5.2 percent to 6 percent range where they think it should eventually settle.

 

One official, Richmond Federal Reserve Bank President Jeffrey Lacker, dissented against the decision, as he has at every FOMC meeting this year.

 

Core Inflation Remains Benign

 

Producer prices in August rose by the most in three years as energy costs surged, but fairly benign underlying inflation pressures should help the Federal Reserve maintain its accommodative monetary policy stance.

 

The strong rise in wholesale inflation last month is unlikely to translate into a sustained increase in prices at the supermarket and shopping mall, which would be troubling for the Fed. The Labor Department said its seasonally adjusted producer price index increased 1.7 percent last month, the largest gain since June 2009, after rising 0.3 percent in July.

 

The increase in prices received by farms, factories and refineries overshot economists' expectations for a 1.1 percent advance. Energy prices, which surged by the most in three years, accounted for more than 80 percent of the rise in wholesale inflation.

 

Other data on Thursday underscored the weakness in the labor market, with the number of Americans filing new claims for state unemployment benefits touching a two-month high, although some of the gain was attributed to Tropical Storm Isaac. According to the Labor Department initial claims for state unemployment benefits rose 15,000 to a seasonally adjusted 382,000 last week, exceeding expectations for an increase to 370,000.

 

The Department said Tropical Storm Isaac, which drenched parts of the country, accounted for about 9,000 of the first-time claims filed last week. The number is not adjusted to take normal seasonal patterns into consideration.

 

Even accounting for the storm, the claims report suggested little improvement in the labor market after job growth slowed sharply in August. The four-week moving average for new claims, a better measure of labor market trends, climbed 3,250 to 375,000, the highest since the middle of July.

 

The sluggish labor market, which is restraining domestic demand, suggests any rise in consumer prices stemming from the spike in producer inflation last month could be temporary, although it will put a squeeze on households.

 

The Department will release its consumer price index on Friday. Energy prices jumped 6.4 percent last month, with gasoline costs surging 13.6 percent. Food prices rose 0.9 percent, the largest gain since November. Prices for dairy products, which rose by the most since June last year, have accounted for a third of the increase in food prices last month. Food prices had increased 0.5 percent the prior month and could remain elevated as a severe drought pushes up the cost of grain and soybeans.

 

If You Thought Intel was Passé

 

Passwords for online banking, social networks and email could be replaced with the wave of a hand if prototype technology developed by Intel makes it to tablets and laptops. In an effort to eliminate the need to remember passwords for growing numbers of online services, Intel researchers have put together a tablet with new software and a biometric sensor that recognizes the unique patterns of veins on a person's palm.

 

"The problem with passwords -- we use too many of them, their rules are complex, and they differ for different websites," Sridhar Iyengar, director of security research at Intel Labs, said at the annual Intel Developer Forum in San Francisco on Thursday. "There is a way out of it, and biometrics is an option."

 

Iyengar demonstrated the technology, quickly waving his hand in front of a tablet but not touching it. Once the tablet recognizes a user, it can securely communicate that person's identity to banks, social networks and other services where the person has accounts, he said.

 

Making laptops, tablets and smartphones responsible for identifying users would take that requirement away from individual websites and do away with the need to individually enter passwords into each of them, Iyengar said.

 

"We plan to work with service providers to take full advantage of this," he said.

 

A device using the technology would use built-in accelerometers to detect when a user puts it down, and would then log its owner off to keep unauthorized people from getting in.

 

The palm-identification technology was one of several demonstrations during a keynote address by Intel Chief Technology Officer Justin Rattner at the forum. Rattner runs Intel Labs, which focuses on identifying and solving future technology problems.

 

Rattner also showed prototype technology to improve cell-phone base stations and to efficiently and wirelessly connect devices such as printers, tablets and monitors throughout the home. A prototype microchip with Wi-Fi technology made with digital circuitry instead of analog, a development that has the potential to lead to major improvements in performance and efficiency.

 

The palm-reading technology, still under development, requires new software and biometric sensors built into consumer devices, but does not require the development of any new kinds of chips, Rattner said.

 

The technology works much better than the finger-print scanners found on some laptops today, he said.