The Markets

What the Fed giveth, the House taketh away: Jubilation on Wall Street after the Fed decided not to begin tapering immediately gave way to concerns about the potential impact of renewed battles over the federal budget and U.S. debt ceiling. The Dow and the S&P 500 hit record closing highs after the Fed announcement only to give back most of those gains by week’s end. The small-cap Russell 2000 also rose post-Fed but was more resilient than its large-cap brethren after the House of Representatives passed a budget that virtually guarantees more fiscal infighting. Meanwhile, investors took advantage of the reprieve from Fed tapering to boost bond prices, sending yields down.

Market/Index 2012 Close Prior Week As of 9/20 Week Change YTD Change
DJIA 13104.14 15376.06 15451.09 .49% 17.91%
Nasdaq 3019.51 3722.18 3774.73 1.41% 25.01%
S&P 500 1426.19 1687.99 1709.91 1.30% 19.89%
Russell 2000 849.35 1053.98 1072.83 1.79% 26.31%
Global Dow 1995.96 2300.09 2349.36 2.14% 17.71%
Fed. Funds .25% .25% .25% 0 bps 0 bps
10-year Treasuries 1.78% 2.90% 2.75% -15 bps .97 bps

Equities data reflect price changes, not total return.

Last Week’s Headlines

  • The Federal Open Market Committee said it will continue to buy $85 billion worth of bonds, at least until it sees whether the threat of fiscal gridlock in Washington will threaten the economy.
  • Increases in the cost of housing and medical care were largely responsible for a 0.1% increase in consumer prices in August. The Bureau of Labor Statistics said that put the consumer inflation rate at 1.5% for the last 12 months, which is well within the Federal Reserve’s target range.
  • Housing starts on single-family homes–the largest segment of the residential construction market–rose 7% in August, putting overall housing starts up 0.9% for the month and 19% ahead of August 2012. However, the Commerce Department said building permits–an indicator of future construction–were down 3.8% for the month, though they were still 11% ahead of last August.
  • A 1.7% increase in sales of existing homes in August put home resales at their highest level in more than six years. The National Association of Realtors® said the nearly 15% increase in the median sales price since August 2012 represented the ninth straight month of year-over-year increases.
  • The nonpartisan Congressional Budget Office said the current level of federal debt relative to gross domestic product is higher than at any time since World War II. The budget deficit has declined to its lowest level since 2008–about 4% of GDP. However, the CBO projected that though the deficit would fall to 2% of GDP in two years, deficits would then gradually begin to rise again, primarily because of higher borrowing costs due to rising interest rates as well as the growing costs of Social Security, Medicare, Medicaid, the Children’s Health Insurance Program, and subsidies provided through health insurance exchanges.
  • German Chancellor Angela Merkel handily won reelection, though her political party will still face a challenge in forming a coalition government with political opponents. The vote essentially ratified Merkel’s strong support of financial assistance for troubled eurozone countries.
  • Industrial production rose 0.4% in August, according to the Federal Reserve Board, and was up 2.7% from a year earlier.

Eye on the Week Ahead

In the wake of last week’s announcement, individual Federal Reserve Board speakers are likely to begin elaborating on the thinking behind the decision. Final Q2 GDP numbers will be in, and data on housing and household incomes and spending could suggest how the economy might fare in Q3.

Key dates and data releases: home prices (9/24); durable goods orders, new home sales (9/25); final estimate of Q2 GDP (9/26); personal income/spending (9/27).