Fed Stimulus to Address Ailing Housing Market

For the week of Monday, September 10, 2012, through Friday, September 14, 2012:

• Standard & Poor’s 500 Index: 1.94%
• Dow Jones Industrial Average: 2.15%
• NASDAQ Composite: 1.52%

The week started with stocks falling for the first time in three sessions, as the market caught its breath after last week’s ascent to multiyear highs. Monday’s drop pushed the Dow from a December 2007 high, and clinched the benchmark’s 13th Monday decline out of the last 15 in the week’s first trading session. Technology-sector stocks were Monday’s worst performers. On Tuesday, stocks rose in anticipation of a German court ruling and the Fed’s monetary policy meeting. The Federal Reserve’s two-day policy meeting brought additional monetary stimulus. The German Constitutional Court cleared the way to allow the country to ratify the euro zone’s permanent bailout fund. By Thursday, stocks spiked after investors’ hopes for Federal Reserve stimulus were fulfilled.

Economic Data

• • International Trade:
    • International trade fell 0.8%.
    • Overseas growth held down exports, as the trade balance did not gain as much as expected.
  • Wholesale Trade:
    • Wholesale inventories climbed 0.7% in July, beating the forecast of 0.3%.
    • Inventories of durable goods rose, as a result of increases in professional equipment, machinery and computers.
    • Metals, electrical and hardware posted declines.
    • The 0.7% build in nondurable inventories was driven by drugs, chemicals and farm products.
    • Petroleum inventories fell 0.7%, bringing the year-over-year change for this category to -13.7%.
  • Producer Price Index:
    • High energy and food cost contributed to the highest producer prices rise in three years, as it rose 1.7% in August.
    • Prices at earlier stages of production also rose strongly.
    • The global economic slowdown is expected to keep input costs moderate through the remainder of the year.
  • Federal Open Market Committee Meeting:
    • The FOMC announced a third round of quantitative easing targeting housing.
    • This market has been missing from the recovery.
    • The Fed plans to purchase $40 billion per month in additional agency mortgage-backed securities, bringing its total monthly bond purchase to $85 billion.
    • This program is open-ended, which is appropriate and more aggressive than market expectations.
    • An open-ended QE gives the Fed the ability to ramp up purchases, as we move closer to the fiscal cliff.
    • The Fed changed its pledge to keep interest rates “exceptionally low” to mid-2015.
    • Policymakers pledged they will adjust asset purchases and utilize other tools, until there is a “substantial” improvement in the job market.
    • Fed policymakers also lowered their expectations for growth.

Earnings

• The Kroger Co. (NYSE: KR)
  • Kroger’s profit dropped slightly facing higher expenses for name brand items.
  • Same-store sales rose 3.6%, when excluding fuel, while merchandise costs also rose 4.3%.
  • Kroger earned $279.1 million, or $0.51 a share, down from $280.8 million, or $0.46 a share, last year during the same quarter.
  • Revenue, including fuel, climbed 3.9% to $21.73 billion.
  • Both numbers beat analyst’s expectation of $0.49 a share and $21.89 billion in revenue.
  • Kroger raised its fiscal outlook to between $2.33 to $2.40.
  • Analysts expect earnings of $2.38 for the year.

Interest Rates

• Interest rates largely moved higher, as investors sold Treasuries in favor of riskier assets.
  • The two-year treasury rate dropped one basis point, breaking its recent trend, it dropped to 0.24%.
  • The five-year treasury rate moved three basis points higher to 0.67%, still low compared to its historical standards.
  • The 10-year treasury rate jumped 11 basis points to 1.78%, still below the 2% mark.
  • The 30-year treasury yield rose 14 basis points 2.97%, edging closer toward 3%, a rate not reached since early May.

Disclosures

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