Last Week:
Mortgages and bonds traded in volatile fashion last week as anticipation grew ahead of the biggest week for the markets that we've seen all year. Interest rates climbed as the selloff grew in he beginning of the week on whispers that the Fed's QE2 would not be as impactful as originally thought. Talks of inflation early in the week also weighed on the fixed rate markets as talks of more easing will stimulate the economic growth and spur inflation growth. Mortgage rates and bonds climbed to pre-easing chatter levels early in the week.
The S&P 500 settled essentially unchanged, sticking to a relatively tight trading range this week as traders awaited an FOMC announcement next week and the midterm elections.
In corporate news, about 180 S&P 500 companies reported earnings this week. Roughly 80% topped EPS estimates, versus 60% topping sales forecasts.
In economic news, the advance estimate of Q3 GDP showed annualized growth of 2.0%, in-line with estimates. While the growth tops the 1.7% rate seen in the second quarter, it is well below the rate needed to spur enough job creation to bring the unemployment rate down significantly.
Existing home sales rose 10% to an annualized rate of 4.53 min units, topping the consensus. New home sales for September increased 6.6% month-over-month to an an annualized rate of 307,000 units, which is greater than the rate ofunits that had been forecasted.
Initial jobless claims for the week fell to 434,000, well below the estimate of 458,000. Unfortunately, just like back in early July when claims last broke through the 450,000 barrier, the decline in the initial claims level was not "real" (i.e., a behavioral decision by firms to refrain from firings). Instead, the claims level was adversely affected by poor seasonal adjustment factors that were unable to correctly account for the Columbus Day holiday. Continuing claims dropped to 4.36 min, a two year low.
THE WEEK AHEAD:
This week, the market's attention turns to the FOMC meeting that is expected to include the announcement of more quantitative easing. In addition, voters hit the polls for midterm elections Tuesday. Republicans are expected to retake the majority in the House. Democrats are expected to lose several seats in the Senate, but maintain the majority. The coming week is likely to go down as the biggest of the year for markets, in terms of potential course setting events. Besides the Tuesday election and Wednesday Fed meeting, the week is capped Friday by the important October jobs report, and there are dozens of major earnings reports in between.
Quantitative Easing-QE, while greeted by markets, is not necessarily viewed as a positive by all analysts,and skeptics believe it could be ineffective and difficult to unwind. In theory, the asset purchases are expected to put more money into the system, reflate assets and help drive down lending rates.
Interest rates are widely expected to see a rally sparked by the announcement of easing this week, but there is much question remaning to how much of a benefit in pricing we'll actually see. Some whispers call for the benchmark 10yr treasury to run all the way to 2.25%, but most don't see that much movement in rates. Mortgages should track the run on the 10yr, but we wouldn't expect to see a run that would give us much better pricing than we've seen in recent weeks leading up to this announcement.
ECONOMIC CALENDAR:
Monday, November 1st
8:30ET Personal Income/Spending/PCE *High* -0.3%/0.5%
10:00ET ISM Manufacturing 54.6
10:00ET Construction Spending -0.8%
Tuesday, November 2nd
Election Day
FOMC Meeting
Wednesday, November 3rd
7:00ET MBA Mortgage Applications
7:30ET Challenger Job Cuts (y/y)
8:15ET ADP Employment Changes 20k
10:00ET ISM Services 53.5
10:00ET Factory Orders 2.0%
2:00ET Auto/Truck Sales
2:15ET FOMC Rate Decision 0.25%
Thursday, November 4th
8:30ET Weekly Jobless Claims- *High* 450K
8:30ET Productivity/Unit Labor 1.0%/0.7%
Friday, November 5th
8:30ET Nonfarm Payroll/Unemployment 25K/9.7%
10:00ET Pending Home Sales
3:00ET Consumer Credit
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