U.S. stocks rebounded from Tuesday’s losses as the dollar slumped – a sign the market returned focus to the strong likelihood that the Fed’s QE2 isn’t only coming but will be every bit as large as expected.  So this pretty much erased concern over Chinese tightening actions that caused traders to de-risk a bit just a couple of days back. 

The latest regional economic survey from the Fed (known as the Beige Book), which we’ll elaborate on below, could have been viewed as pointing to slightly lighter QE; stocks did give back some the earlier gains after the released.  However, the somewhat uplifting report was only so when compared to the previous Beige Book, which was dismal.

Prior to a little profit taking late in the session, the trend in stocks was pretty much the inverse of Tuesday’s trading.  For the greenback though, action in the Dollar Index was essentially the mirror image of the prior session – check this out: 

Basic materials, telecoms and energy led the rally.  Utilities and consumer staples, were the laggards but all 10 of the major industry groups did close higher.

Market Activity for October 20, 2010

Mortgage Apps

The Mortgage Bankers Association reported that their mortgage applications index slid 10.5% last week, down six of the past seven weeks, as both refinancing and purchase activity drove the measure lower.

Applications to refinance fell 11.2% last week as the average contract rate on the 30-year fixed mortgage rose to 4.34% from the record low of 4.21% in the prior week.  Applications to purchase a home fell 6.7%, following the previous week’s 8.5% decline.  Purchases had bounced off of the floor hit in July during August and September, but are sliding toward that low again here in October. 

Beige Book

The Fed’s Beige Book, which is a six-week survey of economic conditions within the central bank’s 12 districts, explained an economy that remains challenged, but expressed improvement following the negative tone of the previous survey. 

The survey pointed to a manufacturing sector that continues to expand, with new orders rising in most districts (Chicago, the largest regional factory base, was propelled by auto assemblies and exports); demand for nonfinancial services was stable to rising a bit (tech services were solid, accounting picked up; but freight volumes declined within the transportation sector).

Some districts reported that loan demand actually picked up slightly, but was overall stable at low levels (commercial and industrial loans remained weak as businesses continued to postpone capital spending plans because of economic and policy uncertainties, according to the Fed).

The report stated that consumer spending was steady to up slightly; retailers said consumers are slowly regaining confidence but remained price sensitive and purchases were largely limited to necessities. 

The reported illustrated that the housing market remained weak, with most districts reporting sales below year-ago levels; commercial real estate remained in the tank. 

Hiring remained limited, with many firms reluctant to add to permanent positions. 

On prices, input prices were rising, yet consumer level prices were mostly stable – little to no business pricing power. 

On the surface this latest regional survey of economic conditions appeared to suggest QE2 will be lighter than expected, but remember that the Fed is framing activity as compared to the previous six-week period – and that previous Beige Book started out by stating that economic conditions showed “widespread signs of deterioration.”  On this basis, I don’t think one can surmise that the next round of QE will be light.  It may begin on a more tepid trajectory than expected, but based on things right now (and remember the Fed is thinking in terms of CPI, the unemployment rate, buoying stock prices and government debt financing) we’ll still end up with at least another $1.0-1.5 trillion in Treasury purchases when QE2 is all said and done, in my view.

Sign up to receive the Daily Insight and other Acropolis publications here.

Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900