Sunday, August 8, 2010

Waiting on the Fed

Stock markets ended higher this week, as the Dow posted a weekly gain of 1.8%, while the S&P 500 went up 1.5%. Interestingly, the volatility index VIX, which is a 30-day risk forecast of stock market volatility, fell 1.6% to end at 21.74. The VIX has fallen significantly since it reached 45 on May 20th. In terms of technicals, the S&P 500 closed at 1,115 on Friday, which is above its 200-day moving average.

However, U.S. employment data released on Friday continued to disappoint. The private sector created 71,000 jobs, which is lower than the 90,000 that economists expected. Meanwhile, the unemployment rate remains at 9.5%. Recent U.S. GDP and employment data have showed that economic growth has slowed in recent months, while unemployment remains stubbornly high. Clearly, the effects of the stimulus package are waning.

Therefore, economists have increasingly called for the Federal Reserve to stimulate the economy. Ben Bernanke has said previously that he may use quantitative easing measures. With the Fed's policy-making committee is meeting this Tuesday, quantitative easing policies such as buying mortgages and other assets is a possibility. Even if the Fed does not announce quantitative easing on Tuesday, it is clear that they will have to do so in the near future.

As for the market outlook this week, the poor employment data released on Friday could continue to have a negative impact on markets. If the Fed were to announce quantitative easing policies on Tuesday, that would logically provide a positive boost for the markets. However, it would also mean that the Fed is acknowledging the economic weakness, which could hurt markets as weak GDP growth becomes more evident.

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