Friday Morning Cheat Sheet: 3 Stories Moving Markets
The markets were mixed in Asia overnight. Japan’s Nikkei increased 2.88 percent on Friday, closing up after a volatile week (more on that below). The Hang Seng fell 0.08 percent, while the S&P/ASX 200 climbed 0.52 percent.
The markets were up in Europe heading out the opening bell in New York. Germany’s DAX was up nearly 1.4 percent, London’s FTSE 100 was up about 0.21 percent, and the STOXX 50 was up about 0.83 percent. Brent Crude climbed to $113.68 per barrel.
U.S. markets at 10:15 a.m.: DJIA: +0.22%, S&P 500: +0.45%, NASDAQ: +0.54%.
1) The Federal Reserve’s balance sheet has grown to a record size with just over $3 trillion in total assets. Chairman Ben Bernanke, exercising the full authority of his office, effectively put the pedal to the metal with $85 billion in monthly securities purchases. This easy-money policy was designed to give the economy enough gas to enter a self-sustaining recovery, but so far progress has been dubious.
Many have argued that the Fed’s current strategy has played itself out, citing diminishing returns and the tremendous instability of the Fed’s massive balance sheet. Minutes from the Federal Open Market Committee meeting in December reveal a divided house, with some policymakers unsure whether asset purchases should continue through the end of the year.
The Fed is looking for U-3 unemployment to hit 6.5 percent as a sign that it can let up on the gas. But at 7.8 percent and only 150,000 jobs added per month, on average, the Fed won’t hit its target rate until some time in 2014.
2) The Nikkei ended a volatile week with 0.55 percent gains and a weaker yen. The two are not totally unrelated. Trying to fight years of stagnation, the Bank of Japan, together with Prime Minister Shinzo Abe, announced a stimulus package worth over a hundred billion dollars that will begin going into effect next year.
Once in effect, the package could prove to be a boon for Japan’s economy, but in the meantime the government will be forced to turn to fiscal measures if it wants to encourage growth. This means weakening the yen versus other major currencies, which amounts to a competitive advantage for some major exporters. A weaker yen means Japanese companies take home more money when they cash out of foreign currencies.
The Nikkei is at its highest level in over a year, surging almost 20 percent since the middle of November.
3) Britain’s economy shrank more than expected in the fourth-quarter of 2012, with GDP contracting 0.3 percent in the wake of the London Olympics. The country has adopted an austerity program that has attracted criticism from the International Monetary Fund, which argues that stimulus is needed to avoid a triple-dip recession.
With very few signs of strength underlying the recent GDP reading, economists fear that first-quarter GDP will contract as well. These fears are backed by an over 10 percent drop in mining and energy output that is the result of abnormal maintenance and outages.
Added bonus: New home sales in the U.S. unexpectedly dropped 7.3 in December after nearly a full year of recovery. Some observers expected the rate of recovery in the housing market to slow down heading through the end of the fourth quarter and into the first quarter, and the year-end decline still left 2012 with 367,000 total new home sales, the highest since 2009.
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