The free fall in oil’s price seemed to befuddle the financial markets in the early part of this week, knocking stock markets into decline and seemingly dispelling hopes of a Santa rally. Proving that the Fed’s power to move the market should never be underestimated though, Wednesday’s FOMC meeting has managed to reverse the direction of share on Wall Street, sparking huge gains both yesterday and today.
By Peter Martin
Friday, December 19, 2014
By early afternoon in New York, the Dow Jones was up 285 points or 1.64% at 17,642 and the S&P 500 Index stood at 2044.9, for a gain of 1.58%. The optimism amongst traders stems from the language used by the Fed in its statement following the FOMC meeting, which struck an encouragingly dovish tone despite recognizing further improvements in the labor market. The Fed sees the current low level of interest rates to be appropriate but the real question is how long will that last. Yesterday’s statement provided reassurance that no change is imminent, saying the Fed ‘judges that it can be patient in beginning to normalize the stance of monetary policy’ and adding that this is consistent with previous statements that promised to maintain low rates after the end of stimulus ‘for a considerable time’.
Jobless claims shrink, services sector slows
On the macroeconomic news front, there was more evidence of the health of the labor market, alongside signs of slowing in both the manufacturing and services sectors. Initial jobless claims fell by 6000 last week to 289,000. The decline came as a surprise, with the consensus estimate calling for no change at 295,000. The fall takes the four-week average for the number of Americans filing first-time claims for unemployment insurance down to 298,750 from 299,500 in the week prior, the first decline in the four-week average since early November. Significantly, last week comprises the sample week used by the Bureau of Labor Statistics for its December Employment Situation report and should keep expectations in place for a solid performance.
Markit’s flash reading for December of its services PMI came in at 53.6, a result that suggests the sector is still expanding, albeit at a slower pace than in November, when the mid-month reading was 56.3. There has been a trend of slowing shown by this indicator every month since June and today’s outcome is the lowest reading since back in February when the economy was hit by extreme weather conditions.
Manufacturing also appears to have hit a speed-bump this month, judging not just by Markit’s flash manufacturing PMI on Tuesday, but also by softness indicated in regional surveys conducted by various Federal Reserve Banks. Monday’s Empire State manufacturing survey slumped into negative territory and though today’s report from the Philly Fed wasn’t quite as bad, it still points to a loss of momentum. The Philly Fed’s General Business Conditions Index, which gauges manufacturing conditions in the Third District, declined to 24.5 in December, after November’s outstanding 40.8. Slowing was apparent across the board, so clearly conditions have slowed; however, November was such a remarkably strong month, that December looking negative in comparison isn’t very surprising and it’s worth bearing in mind that this is the third-highest reading of the Philly Fed survey in 2014.
The next regional manufacturing survey is from the Kansas City Fed and is released 11.00 ET on Friday.
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