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By Jeffrey
Cane | Wednesday, September 22 T-Minus
Taper. Today was something of a
relief rally, as concerns over the Federal
Reserve's unwinding of stimulus
and the troubles at China
Evergrande Group eased. Buoying
markets early in the day was a statement from Evergrande, the Chinese
property developer teetering under the weight of some $300 billion in debt,
that it had "resolved"
one coupon payment due tomorrow. That calmed fears of an imminent
collapse and a broader Chinese contagion. Still, details about the deal were
scant, and as of this writing, there was no news about a second payment also
due tomorrow. With stocks
already in positive territory, the Fed
signaled this afternoon that it would soon begin reducing its
monthly purchases of $120 billion worth of Treasury and mortgage-backed
securities. "The FOMC laid the groundwork for a tapering in
November," wrote Stephen
Stanley, chief economist for Amherst
Pierpont Securities, adding that "I
thought the forward guidance was pretty close to the most explicit that could
realistically be expected." The Dow
Jones Industrial Average was up as much as 500 points after the Fed’s
2 p.m. announcement, ending the day up 338 points, or 1%. The S&P
500 Index closed up 0.95%. For both indexes, it
was the strongest session since late July, snapping four-day losing streaks.
The Nasdaq Composite rose 1%. The Russell
2000 advanced 1.5%. The
expectation now is that a tapering will be announced after the conclusion of
the Federal Open Market Committee's next
meeting, on Nov. 2 and 3, with the reductions in bond purchases
beginning that month to be completed by mid-year, according to a Bank
of America Securities note. Lawrence
Gillum, fixed income strategist
for LPL Financial, sees the
actual tapering starting in December. Fed
officials also signaled today the possibility of higher interest rates coming
faster than previously thought. Barron's Lisa
Beilfuss explains: In its
quarterly summary of economic projections, the Fed revealed that half of the
Federal Open Market Committee’s 18 participants now expect to lift interest
rates at least once in 2022. Two members moved their so-called dots forward
to predict raising interest rates next year. The Fed has telegraphed it
wouldn’t raise rates before 2024, but some policy makers have expressed
rising concerns over
inflation. Wall Street
thought one official might have shifted his or her forecast to suggest an
earlier liftoff, but many economists and strategists didn’t expect to see two
members do so. The fact that two did bring forward liftoff projections is
significant because now half of the FOMC expect rates to rise in 2022. That's a
hawkish message, to be sure. According to the CME FedWatch tool, which is
based on CME Group 30-Day fed-fund futures prices, there is now a 71.7% chance
of at least one rate increase by the Fed's Dec. 14, 2022 meeting, up from
55.1% just yesterday. But the
change in the forecasts is also an encouraging sign for
investors because Fed policy makers clearly see the economic recovery as
gaining momentum. Scott
Anderson, chief economist of the Bank
of the West, noted that Fed policy
makers' median projection of GDP growth for 2021 was lowered to 5.9% from a
7% forecast in June. "However, the FOMC expects some of that lost GDP
growth in 2021 to shift into 2022 and 2023, revealing confidence the economic
momentum and above potential GDP growth can continue in the years ahead
despite near-term bottlenecks, inflation, and the on-going pandemic," he
wrote. Stocks
rallied, but the reaction in bonds was more muted. The yield on the 10-year
Treasury note settled slightly higher, at 1.332%. Elsewhere, crude
oil futures rose nearly 2.5%, to $72.23 a
barrel. Gold gained for a third day, settling
at $1776.70 an ounce. The U.S. dollar was stronger against other major currencies,
while Bitcoin regained some ground from recent loses,
trading at $43,445.06. |
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