August 28th, 2013 9:36 AM by Mel Samick
Nearly every investor out there wants to know when the Federal Reserve will start to tighten its quantitative easing. Now it seems like the Fed itself is trying to figure that out. The stakes are extremely high. A change in Fed Policy won't just affect U.S. markets. Investors in Europe, Asia and other markets could end up blindsided if they don't prepare for a shift. The Fed has no easy task. If the Fed tapers the quantitative easing program that has pushed interest rates down and stock prices up, you could scare investors who aren't sure the economy is ready to stand on its own. The primary goal of QE is to accelerate the housing recovery. There are signs that portray this evidence. Home prices have been rising by double digits since bottoming out in 2012. The latest data shows that existing home sales, which accounts for 90 percent of the housing market, are up 17 percent from last summer. On the other hand, new home sales, which better reflects real time conditions, fell unexpectedly to a nine-month low, casting a shadow over the housing recovery. Sales dropped 13.4 percent to an annualized rate of 394,000 units.
Mortgage rates have surged since May on bets that the Federal Reserve feels that the U.S. economy has strengthened enough for the Central Bank to wind down a major stimulus program. The average weekly rate for a 30-year fixed-rate mortgage jumped to a two-year high. The rate is now 4.58 percent, up from 4.4 percent the prior week. A recent survey by real estate company, 'Trulia', found that an increase in mortgage rates was the prime concern among 41 percent of consumers, who worried about that more than price increases.
The actions of the U.S. Central Bank even seem partly responsible for a plunge in the value of the Indian rupee. Foreign investors have yanked money out of India in recent months amid fears over the winding down of U.S. monetary stimulus and deteriorating economic conditions in the country. The rupee has been one of the world's worst performing currencies this year, slumping 18.6 percent since the start of the year. Last Wednesday the rupee slumped to a lifetime low of 64.56 and analysts believe it will fall to 70 in coming months. While the free-fall in the rupee threatens to worsen India's economic fundamentals by widening the trade deficit and stoking inflation, the country's citizens living overseas aren't sweating it. In fact, many opportunistic Indians working abroad are rushing to transfer money back home in order to take advantage of the never-before-seen weakness in the currency. If you ever wanted to see the Taj Mahal, now might be your best chance!
As Investors are trying to figure out the health of the economy, this week's economic reports will be watched closely. July Durable Goods orders are due Monday while the final reading for Consumer Sentiment will come Friday. Perhaps the most important will be Thursday's latest estimate of U.S. Gross Domestic Product for the second quarter. The data is expected to show the economy grew a revised 2.2 percent last quarter compared with a 1.7 percent reading last month. While a weak report would be a bearish sign for the economy, some analysts speculate that a strong reading could have negative implications for the market. A good reading might suggest the Fed could take a bigger bite out of the stimulus.
Information Provided by NYCB Bank Capital Markets