All About That Base (fed Funds Rate)
U.S. stocks began the week continuing the rise in Globex index futures.
By Vikram Rangala
Monday, March 16, 2015
The Dow Jones Industrial Average jumped 113 points, or 0.6%, to 17,861. As often happens, US stocks took their cue from European and Asian equities, which rose as central banks on both continents are supplying plenty of liquidity. China's central bank confirmed its commitment to ongoing fiscal stimulus, leading the Shanghai index to its highest level since August 2009. The DAX topped 12,000 for the first time ever as Mario Draghi prepares to speak in Frankfurt at 7:45PM CET/2:45PM ET.
The S&P 500 opened 13 points or 0.6%, higher at 2,066. The Nasdaq Composite began the day up 24 points, or 0.5%, at 4,895.
Crude oil dipped below $44 a barrel to its lowest level in six years, while Brent fell below $54 a barrel. The continued surge in the dollar is the most likely reason as the supply and demand equation has not changed significantly in the last few weeks.
US manufacturing saw mixed news as the Fed's Industrial Production indicator came in below expectations, but the major focus of investor attention is on news from this week's U.S. Federal Reserve's meeting. The Fed is expected to drop the now over-emphasized word "patient" from its remarks.
However, it has also made clear that it will raise rates only in response to certain benchmarks, namely a sustained 2% inflation and wage growth along with continued job creation. Lee Hardman of Bank of Tokyo-Mitsubishi in a research note on Monday said, "Fed Chair Yellen has clearly highlighted that removing "patient" will not necessarily signal that a rate hike will come as soon as June."
While the removal of the word is really a non-issue, the ripple effect of the US Treasury yield versus that of other countries' and the secondary effect on currencies and stocks is the real reason the Fed's action (or inaction) is being treated as a major event.
The dollar's strength also continues to drive the euro's decline. With the unified currency now hovering above the $1.05 mark, analysts and investors seem prepared for euro-dollar parity in the near future.
And not only investors. French President François Hollande said last week that he thought the euro had reached the "correct equilibrium" with the dollar, adding, "It makes things nice and clear: one euro equals a dollar."
The euro may not stop at parity, however. Goldman Sachs predicted last week that the euro may cost only $0.80 by the end of 2017.
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