September 19th, 2012 9:29 AM by Mel Samick
With the FOMC meeting last week, the Fed's quantitative easing announcement and the ECB bond buying program were squarely on investors' radars. In the first half of the week, investors were moderately encouraged after the ECB announced the bond buying program to help the most troubled countries in the euro currency block, should they request additional aid. However, things started picking up even further after the results of the FOMC meeting were announced on Thursday. The Committee is concerned that without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. The Federal Reserve announced multiple steps as part of another round of quantitative easing, so-called QE3, to spur economic growth. To keep mortgage rates low, the Fed will buy an additional $40 billion per month of agency-issued Mortgage-Backed Securities until the labor market improves significantly. The FOMC pointed to problems in the labor market and implicitly Europe for its latest policy moves. At the same time, at least until the end of the year, it will also continue "Operation Twist", which churns the Fed's portfolio in favor of longer-dated Treasury bonds. The Fed also decided to keep the low fed rate policy until mid 2015, extended six months from the original maturity date.
Betting on the Fed's move, all major indices ended in positive territory at the end of the week. The S&P closed at 1,466 while the Dow ended the trading week at 13,599. In major economic indicators released last week, and in line with market expectations, Consumer Prices increased by 0.6 percent in August, while core prices increased by .1 percent. Also, Retail Sales jumped by .9 percent in the month of August, more than market expectations. Following the same line, Consumer Optimism came in at 79.2, against expectations of 73.5. However, Industrial Production decreased during August by 1.2 percent, which was worse than the 0.2 percent decrease that had been widely expected. Consumer Borrowing tightened by $3.3 billion in July, as installment borrowing for autos and education loans slowed. Consumers paid off $4.8 billion of revolving credit while borrowing only $1.5 billion.
The Fed's plan to not buy Treasuries left the Ten-year treasury yield up 19 basis points ending the week at 1.87 percent. In contrast, and due to the Fed's MBS buy program, mortgage rates were down last week. At the end of the week the Conforming Fixed 30-year rate leveled out at around 3.34 percent, while the Conforming Fixed 15-year rate finished around 2.75 percent. Standard 5/1 ARM rates were hovering around 2.75 percent.
This week, investors will be busy dealing with the aftermath of the strong reaction from the Fed's move. In other major economic indicators, the housing sector health will be gauged from the Housing Market Index on Tuesday and Housing Starts releases on Wednesday. Leading Indicators and PMI manufacturing Index, on Thursday, will provide investors with an update on the manufacturing sector.
Information Provided by NYCB Capital Markets