Market Talk

US stocks little changed, after the Fed again dances around the question of whether it will throw yet another net under the economy. They talked real smart, and danced around the issue, but ultimately didn’t really say anything new (although they came perilously close to almost saying “deflation.” But they didn’t.)

DJIA adds 7 to 10761, but S&P 500 slips 3 to 1140, Nasdaq Comp eases 6 to 2349. Stocks did rally, but gave it back by the close. You wonder what’ll happen with stocks. Have they climbed too far? Are the heights too much? I tend to think that the bulls have this thing by the tail, to mix metaphors, and aren’t about to let go. The data are (marginally) better, the central bank’s got their back, the midterms are coming up and everybody expects the business-friendly party to come back to town. ‘Course, you never know.

Treasurys and gold stick their rallies, however, while the dollar sells off. Yield on the 10-year Treasury note fell back to 2.58%, and gold jumped to $1,287. The dollar got smacked around. With the Fed ever-so-subtly threatening to debase the currency, euro jumps to $1.3240, and the yen slides to 85.05, although there’s no overt signs the Bank of Japan stepped in to defend its line in the sand.

What’s been going on the past week or so is really something to see, though. Stocks, gold, Treasurys are all rallying. It can’t last and somebody has to be wrong, but if there is, ahem, some invisible hand behind all this, it’s doing one bang-up job right now.

Anyhow, key event today was the statement coming out of the Fed’s one-day rate-setting meeting. The bankers kept rates at zero, of course. But it’s assessment of the economy wasn’t so hot, and the Fed says it’s prepared to “provide additional accommodation” if needed. While it didn’t signal the start of any new bond-buying programs, most read this as yet another incremental step toward what’s being called QE2, another massive bond-buying program to hold things together.

But it did say, in it usual circuitous way, that inflation’s too low, and if it goes much lower, the central bank will step in. The Fed’s stance raises the issue of how other central banks will react to the notion of the world’s premier central bank bashing its own currency. As our colleague Mike Casey wrote this afternoon:

The FOMC’s latest dovish statement implying further QE to fight deflation lands at an awkward time in global currency markets. The dollar is weakening on the news, but that’s not what central banks from Brazil’s to Japan’s want to see. There’s a distinctive shift toward more intervention around the world right now. Anything the Fed does to soften the dollar raises the risk of a self-destructive round of competitive devaluations. It’s yet another sign of how global imbalances are making it harder for policymakers.

“Competitive devaluations.” Keep that phrase handy.

Language that jumps out in this latest FOMC statement comes in the final paragraph. Clever, as Bernanke & Co. know that in show business, it’s always important to have a strong close.

The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.

Translation: We’re still prepared to do whatever it takes to get this economy off the ground, and ready to do battle with deflation.

See that little trick they used? Instead of using the words “deflation” or “deflationary” or “disinflation,” the committee said it’s ready to “return inflation” to levels “consistent with its mandate” (price stability.)

Committee certainly isn’t talking about returning inflation to lower levels. Sounds like the first time the FOMC is actually, in a very indirect way, saying it’s locked & loaded for deflation.

What's he doing in there?

If I were a betting man, if I were in the markets and not just somebody who reports on the markets, I’d be betting hard money that the Fed will do nothing today. If I could find anybody to lay odds on that, of course.

It just seems kind of nuts to think the Fed is going to embark on some major initiative today, at the end of its one-day rate-setting meeting. Isn’t the economy healing? Isn’t the recession over? Haven’t the data points been getting better? Then why are so many people thinking the Fed’s going to jump back in with some big support program?

Of course, on the issue of rates, it’s beyond obvious that the Fed’s not going to raise them, despite the fact that the recession is apparently over and the economy growing again. You want to know when the recession will really be over? When the Fed starts raising interest rates.

But the market isn’t focused on that. The market, and not just the stock market, is focused on whether the Fed’s going to announce a new round of quantitative easing, buy Treasurys in order to hold down interest rates (and, oh, if some of that money happens to trickle down to risky assets like, say, stocks, well, they can’t really help that now.) In the market, this is a real question.

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Stocks are hardly moving at all, although Treasurys are rising, as everybody’s waiting to see what the Fed’s going to say this afternoon. (It seems odd to me, because, you know, the recession’s over and all that, but people are actually expecting the Fed to do something material in support of the bond market and economy.)

I meant to get to this over the weekend, but all kinds of domestic bliss issues got in the way. But it’s still relevant today, and maybe even more so now that the NBER’s declared the recession over.

Let’s accept at face value that the “recession,” the narrowly defined slide in economic activity that began in December 2007, ended in June 2009. It’s important to keep in mind this definition refers only to the slide in economic activity. Anybody who lives in the real world knows the economy remains even today in a very weakened state, maybe not technically a recession but certainly not anything even faintly resembling salad days, and that important spark that sets the economic cycle going again has yet to show up.

The recession’s end means absolutely nothing to the 15 million unemployed Americans, and is cold comfort to the millions more who are underemployed, working only part-time. It’ll elicit only a Bronx cheer from the millions more who haven’t seen a raise in two years, or have had their salaries cut, or their benefits cut, and have watched the value of their homes slide, for many below what they paid for it. It won’t mean much to the people who have seen their property taxes rise, or have to shoulder more costs for their childrens’ schooling, things that used to be covered by their (rising) property taxes.

I don’t know about you, but I know people who are still losing their jobs. I learned of another one just the other day. There are still a lot of empty storefronts where I live. There’s one shopping center by me, that I can’t remember ever having empty stores. Now it’s got gaping holes where big stores used to be, Mandee’s, Blockbuster. Unlike in the past, nothing new is coming in. The movie theater there just closed down. This is a theater that’s been around as long as I can remember. I saw “Star Wars” there (and I don’t mean those lousy prequels, I’m talking 1977-vintage, Han-shot-first version.) Now the marquee just says “thank you for your patronage.”

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Now it’s getting interesting.

With major US stock indexes at their highest levels in more than four months, an FOMC meeting today, a raft of housing data due this week and a smattering of quarterly earnings reports, action in equities markets should remain quite lively.

DJIA closed yesterday at its highest level since May 13. Back then, if you recall, stocks had just begun a swoon that would strip the DJIA of more than 700 points in just five sessions. Similar setup four months earlier, in January; DJIA at similar level, fell 553 points in three sessions.

Another factoid for your consumption – following the last FOMC meeting (also a one-day affair on August 10th), the DJIA closed about a hundred points below where it currently sits. The next day, it fell 266 points.  

 August housing starts set for 8:30am; FOMC statement due around 2:15pm. Yesterday’s US rally inspires only modest gains in Asia overnight. Europe, and euro still rallying, ostensibly helped by “successful” bond auction in Ireland.

Amusing, what some perceive as success. Ireland has to pay more than 100 bps more than it paid a month ago on the four-year paper it sold. That’s success?

Imagine it this way: you’re desperate for a loan, and BofA, Citi and JPMorgan all say no way. So you go to the local payday loan place, and they spot you the cash you need – at a rate that might make a loan shark blush. But it’s a success, right? You got the money. And so it is with these countries in Europe — success at getting the much-needed cash, but at what cost?   

S&P futures flat; 10-yr also still rising, yield down to 2.68%.