Investors today will weigh two major reasons to get either bullish or bearish for the second quarter, earnings and the Fed’s plans. So far, however, stocks have risen slightly but been otherwise unfazed.
By Vikram Rangala
Wednesday, April 8, 2015
The earnings season unofficially kicks off Wednesday with results from aluminum company Alcoa. First-quarter earnings in S&P 500 firms are projected to be 2.8 percent lower than a year ago, which would be the worst quarterly results since the third quarter of 2009, the beginning of the end of the Great Recession.
Dividends are also due to disappoint in commodity-related sectors like energy. The Economist reports, “Eni, an Italian oil major, Transocean, a drilling firm and Freeport-McMoran, a mining company” are all reducing payouts to shareholders, part of the worst dividend drop across the S&P since 2009, when banks were collapsing.
The “sanguine” reaction of US stock indices, which have been rangebound for the last couple of weeks, may be a sign that the market is "not expecting much" as Joe Bell, senior equity analyst at Schaeffer's Investment Research in Cincinnati told Reuters.
The MBA Mortgage Applications index report came out in the pre-open this morning. Mortgage applications for home purchases rose for a 3rd straight week, up 7.0 percent in the week of April 3 to the highest level since July 2013. The index is up 12.0 percent versus 2014. This adds to earlier positive news about demand in the housing sector, just as warmer temperatures encourage house-hunting and construction.
The major news for traders today will be the 2 PM Eastern release of the minutes from the last FOMC meeting. As usual, they will be parsed for members views on whether the recent disappointing news about unemployment and other factors represents a temporary slowdown or a sign of larger problems. Given that the Fed’s hawks and doves have been relatively outspoken in recent weeks, however, the minutes may not reveal anything the members have not already made plain in their public statements.
While the minutes may give hints in the wording, the real news may lie in the data that the members discussed. The Fed has made much about its “data-driven” decision-making, so analysts will look closely at which data they looked at.
The minutes may also shed light on another part of the Fed’s decision-making, that is separate from raising the Fed Funds rate. While the base interest rate is what gets the headlines and quick news bites, the Fed has other tools it uses to constrict and expand the supply of money.
Remember that quantitative easing involved the Fed’s buying of trillions of dollars’ worth of bonds, paying for them with money printed by the US Treasury. This added to the Fed’s balance sheet a huge portfolio of investments. Remember when at one point we the people even sort of owned General Motors?
Its great task now is pulling those trillions back out of the economy without doing it harm. And one of the first tests of how well it can wean the US economy is coming up in early 2016. That’s when about $216 billion in Treasury debt will mature and Fed will get that money back. It can either reinvest it out again, or just let the bonds expire and effectively take it out of the money supply.
In other words, the Fed can quietly start shrinking the money supply without raising the Fed Funds rate at all. I say “quietly” not because they’ll keep it hush-hush, but because it’s a little harder to explain (as I’m now demonstrating) than just quoting a percentage number. That means the media won’t cover it and the public won’t follow it closely. As undemocratic as it sounds, it may be for the best.
As Bloomberg explains, “The Fed has good reasons to shrink its balance sheet. Buying securities pumped trillions of dollars of excess reserves into the banking system, making it harder to control the Fed Funds rate.” Reducing those excess reserves will make changes to the fed funds rate more effective in encouraging continued lending, without the Fed having to get mixed up in the vagaries of the money markets.
It may also, by requiring the economy to generate instead of borrow wealth, help achieve the increase in inflation and wages that the Fed is targeting.
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