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September 13: Taper Decision, Economic Data on the Cards

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A soft Retail Sales report and benign wholesale inflation reading provide the backdrop for today’s trading action, ahead of next week’s all-important Fed meeting that is expected to usher in the long-awaited ‘Taper.’ A report in a Japanese newspaper is claiming that the administration is getting ready to announce the appointment of Larry Summers as the next Fed Chairman, with the announcement coming as early as next week.

On the home front, the August Retail Sales came in weaker than expected, presenting a mixed picture of the all-important consumer economy. While the prior month’s growth pace was revised higher, August’s numbers missed expectations both on the ‘headline’ as well as excluding autos and gasoline.

The ‘softish’ August numbers mirror the overall soft tone of commentary from big retailers like Wal-Mart (WMT - Free Report) , Macy’s (M - Free Report) and others on the second quarter earnings calls. But the July revisions indicate that the economy got off to a good enough start in Q3. Consumer spending, which accounts for more than two-thirds of the U.S. economy, was up 1.8% in Q2, and the growth pace will likely remain in that vicinity in the current period as well.

The economic calendar is very busy next week, with a host of housing and factory sector reports on deck. But all eyes will be on the Fed, which is expected to announce the start of ‘tapering’ its monthly bond purchases on Wednesday.

We will also get the Bernanke press conference and FOMC members’ economic forecasts. It will be interesting to see how the Fed’s outlook for next year has evolved since the June meeting when they modestly raised their forecasts.

Stocks have shrugged the ‘Taper’ issue altogether lately, even though 10-year treasury yields remain close to the 3% level. Investors appear to be betting that improved economic prospects and the resulting bump in corporate profitability will more than offset higher interest rates.

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