Fed minutes suggested that monetary stimulus would be arriving soon and benchmarks pared much of their initial losses to close mixed on Wednesday. Minutes from the Federal Open Market Committee (FOMC) noted that policy makers were worried about economic growth and "many members" are in favor of additional measures. Separately, the National Association of Realtors came out with improved existing home sales data.
The Dow Jones Industrial Average (DJI) dropped 0.2% and ended at 13,172.76. The Standard & Poor 500 (S&P 500) added paltry gains of 0.02% to finish yesterday’s trading session hardly changed at 1,413.49. The tech-laden Nasdaq Composite Index increased 0.2% and closed at 3,073.67. The fear-gauge CBOE Volatility Index (VIX) edged up a meager 0.6% and settled 0.09 point higher at 15.11. Consolidated volumes on the New York Stock Exchange, American Stock Exchange and Nasdaq were roughly 5.45 billion shares, once again lower than the daily average of 6.62 billion. Decliners outshone advancers; as for three stocks that closed in the negative zone, two finished in the green.
The day was dominated by FOMC minutes. Apart from the fact that summer holidays are underway, investors have also adopted a wait-and-watch attitude over the past few weeks, and both these factors have kept volumes low. Investors are cautiously awaiting concrete actions by the central banks of the U.S., the E.U. and even China. In this context, FOMC minutes helped the benchmarks recover their initial losses to an extent.
Getting into the details of FOMC minutes, the most important part of it which lifted the mood was: "Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery". Investors were quick to react to news that “many members” this time voiced their support for the need of monetary measures, or a third round of quantitative easing (QE3). This compares favorably with the fact that only “A few” policy makers were in support of further economic measures according to previous FOMC minutes.
With investors’ belief riding high that the Fed minutes had increased the possibility of QE3, all eyes will now be on the central bank’s annual meeting that is scheduled at the end of next week at Jackson Hole. Investors’ hopes for additional economic measures have been dashed on earlier occasions. However, with macroeconomic challenges looming large and a number of dismal economic readings, their hopes are riding high. In fact, according to Reuters, market strategists commented that the Street believes that the Fed will have to plunge into action ‘sooner rather than later’.
Incidentally, while the Fed looked for soft signs from the economy, housing data came in positive yesterday. The National Association of Realtors reported that total existing-home sales jumped 2.3% in July to climb to a seasonally adjusted annual rate of 4.47 million. The chief economist of NAR, Lawrence Yun, commented: “Mortgage interest rates have been at record lows this year while rents have been rising at faster rates. Combined, these factors are helping to unleash a pent-up demand”.
The report gave a boost to the housing sector and the SPDR S&P Homebuilders (XHB) jumped 1.6%. Among the stocks, Toll Brothers Inc (NYSE:TOL), PulteGroup, Inc. (NYSE:PHM), D.R. Horton, Inc. (NYSE:DHI), Beazer Homes USA, Inc. (NYSE:BZH), Lennar Corporation (NYSE:LEN), M/I Homes Inc (NYSE:MHO) and KB Home (NYSE:KBH) gained 3.8%, 3.9%, 4.1%, 2.4%, 3.8%, 4.2% and 2.8%, respectively.