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Fed Upgrades Forecast on Labor, Inflation Improvements; Stocks Rally


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

Early this morning it was revealed that the first developed-market central bank had its members dissent about keeping rates close to zero. The minutes of the Bank of England's meeting from two weeks ago showed two members of its Monetary Policy Committee - Weale and McCafferty - dissented in favor of a 25bps rate hike. UK Gilts and the sterling reacted accordingly, the former selling off with a bias towards shorter durations, and the latter strengthening versus the major G-10 currencies. It was interesting to note, however, after the release of the minutes, that the sterling was actually weaker versus the dollar.

US stocks traded listlessly for most of the day in anticipation of the afternoon release of the minutes from the latest FOMC meeting. The S&P 500 (SPX) briefly made a new all-time high during the session, but ended up finishing about a point below the recent all-time closing high of 1987.98. All 10 of its sectors finished positive with industrials leading for a second straight day. High yield bonds continued to perform very strongly, giving equities another tailwind.

The minutes of the FOMC meeting from three weeks ago revealed an increasing bias towards removing policy accommodation at a faster rate due to increased improvement in the labor market and inflation moving up towards the Fed's 2% goal. This had caused the Fed to upgrade its assessment on inflation. Although many participants viewed the recent labor market gains as a reason to begin hiking rates at an earlier date, several still saw inflation moving back only slowly towards it goals. Presumably the "several" is the dovish, voting members of the committee, who have been in relative control of policy in recent years.

Short-term and intermediate Treasuries sold off following the release of the minutes and the USD rallied substantially. The 5-year Treasury yield was six basis points higher to 1.63% and the USD gained 0.45%. US stock indices were generally stronger. The focus for the market now turns to speeches from Janet Yellen, Mario Draghi, and Ben Broadbent on Friday at the Jackson Hole Fed symposium.

Tomorrow's Financial Outlook

Tomorrow morning two economic reports are scheduled in the US: weekly jobless claims and existing home sales from July. Related housing data reported earlier this week was very strong and its expected to be at roughly the same pace in existing home contracts. The four-week average of jobless claims fell to the lowest level of 2006 in the week prior, and its expected to remain near that level this week.

Overnight a big piece of data is due out, the preliminary August reading of China's manufacturing PMI. The index has risen for the six consecutive months and in order to keep up the torrid pace of equity gains, it will need to continue to increase. Of worry is the substantial drop in credit activity in July, which will likely cause raw materials-related contracts to be reduced. The index is expected to decline to 51.5 from 51.7 in July. Similar reports are due out from Europe in addition to UK retail sales.

Only four companies are scheduled to report earnings tomorrow and they are retailers. These are from Gap (GPS), Ross Stores (ROST), Dollar Tree (DLTR), and Aeropostale (ARO).

Twitter: @Minyanville

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No positions in stocks mentioned.

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