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Fed Signals QE Tapering Could Come Sooner Than Expected

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Today's financial recap and tomorrow's financial outlook.

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An advisory panel to the world's largest pension fund, the Japanese Government Pension Investment Fund, released an interesting report overnight. The panel noted that the fund should diversify its domestic bond holdings with projected inflation of 2% over the next few years. Current yields on the fund's Japanese government bond holdings would not be able to keep up with that level of inflation. The panel recommended the fund favor overseas assets and domestic REITs or private equity funds.

The minutes from the October FOMC meeting were released in the early afternoon. The minutes indicated that the FOMC saw the potential for tapering of asset purchases over the next few meetings. However, the FOMC was looking at ways to the explain to the market the differences between its two policy tools of forward guidance and large asset purchases. In theory, the FOMC would lower asset purchases while committing to keeping the Fed funds rate near zero for longer -- essentially a policy-neutral movement. Long-end Treasuries sold off violently, though shorter-duration notes rallied.

US equities remained around the flat line throughout the day, but sold off after the release of the minutes. Health-care stocks showed relative strength today; health care was the only sector that gained. The gains were led by pharmaceutical and biotech companies. Utility- and material-sector stocks struggled due to higher interest rates and falling precious metals prices.

Two other headlines were a factor in the day's trading. A Bloomberg article indicated that the ECB was contemplating lowering its deposit rate into negative territory. Additionally, the German newspaper Zeit reported that the ECB will begin releasing the minutes from its monthly Governing Council meetings on monetary policy. Other major central banks like the Bank of England, US Federal Reserve, and Bank of Japan already do this.

Retail sales rose 0.4% in October from the prior month. Economists had been forecasting a gain of 0.1%. In the same month, the year-over-year rate of consumer price gains fell to 1%, the slowest rate of increase in 48 years. Core retail sales remained strong, but were influenced by strong iPhone (NASDAQ:AAPL) sales during the month. However, it is clear that the government shutdown has not had a material effect on economic activity. October existing-home sales fell 3.2% month-to-month to a 5.12 million annualized rate. Home prices did stabilize, though, after falling 4.1% in September.

Tomorrow's Financial Outlook

The US will release the prior week's initial jobless claims in the morning before the market opens. Claims are estimated to fall to 335,000 from the prior week's 339,000. The four-week moving average of claims currently stands at 344,000. Additionally, the US will release October producer price changes. The index of price changes is estimated to remain unchanged at 0.3% year-over-year from September.

The day will be very busy with overseas economic data releases. China and the eurozone will release manufacturing data in the early morning. Additionally, the Bank of Japan will release its monthly monetary policy decision and the eurozone will report October consumer confidence. All have the potential to move the markets overnight.

Major earnings reports will be centered around retailers. Notable reports include Target (NYSE:TGT), Sears Holdings (NASDAQ:SHLD), Abercrombie & Fitch (NYSE:ANF), Gap (NYSE:GPS), Ross Stores (NASDAQ:ROST), Pandora (NASDAQ:P), Splunk (NASDAQ:SPLK), Gamestop (NYSE:GME), and The Fresh Market (NASDAQ:TFM).

Twitter: @Minyanville

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