The stock market has been all over the place in recent weeks
as it struggled with sizing up the Fed's next move. Sentiment
appears positive ahead of the open, with plenty of green arrows
from overnight market action in Asia and Europe. But as we have
seen repeatedly in recent days, the mood could shift very easily
during the day.
On the data front, the New York Fed's Empire State
manufacturing survey came in better than expected. We have the
homebuilder sentiment index coming out a little later today, with
the index expected to be tick up from the prior-month's
We have other housing-related data on tap later this week,
with housing starts and permits numbers coming out on Tuesday
expected to show continued momentum in this key sector of the
economy. Also coming out this week is inflation, leading
indicators, and the Philly Fed regional manufacturing survey.
But the most important event this week is the conclusion of
the Fed's two-day FOMC meeting on Wednesday, economic forecasts
from the committee, and the Bernanke press conference. The hope
is that investors will get a clearer sense of the Fed's thinking
on the 'taper' question as a result of developments on Wednesday.
The markets understand that tapering didn't mean the end to the
QE program and that the eventual rise Fed Funds rate was a long
But markets tend to look ahead and start reflecting those
future end-points. The recent spike in long-term interest rates
is a reflection of the bond market pricing those future Fed
actions. Bernanke's assurances next week will be useful, but the
Fed doesn't have a lot of influence over the longer end of the
yield curve beyond the QE program.
The reality is that the Fed will start pulling back on the QE
program if it feels that the economy was on a strong and
sustainable footing. Higher interest rates are no doubt
problematic for stocks, but they could potentially be offset by a
growing economy and the associated improved earnings.
As such, a change in Fed policy would be a very reassuring
signal about the health of the economy. And a stronger economy is
far more beneficial to the stock market than more monetary
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