The most significant market report of the week came today from the Federal Reserve’s Federal Open Market Committee. The report helped the Dow Jones Industrial Average finish up 0.47% for the day falling just below the 17,000 mark at 16,985.48. Markets have retreated slightly during the beginning of the week with the DJIA down 0.48% and the S&P 500 down 0.64%. Year-to-date the DJIA and S&P 500 are both up with the S&P 500 leading the DJIA at 6.73% while the DJIA has returned 2.47%.
The June FOMC minutes continued to show a steady continuation in QE3 tapering ahead with a federal funds rate hike expected for 2015. Markets have priced in a federal funds rate increase occurring near mid-2015.
According to the FOMC’s tapering schedule QE3 asset purchases will end in October 2014. The decrease in purchases will have adverse effects on markets which are seeing longer-term Treasury prices rising and yields falling during the QE3 taper. For example the 10-year Treasury yield has moved from 2.89% on December 18, 2013 to a current yield of 2.58%. In the housing market Freddie Mac’s Primary Mortgage Market Survey has shown average 30-year fixed-rate mortgages moving above 4% and reaching as high as 4.53% during the QE3 taper.
Following the end of QE3 purchases the market could likely see changes made to the Federal Reserve’s reinvestment of mortgage-backed securities which continues to keep MBS investment high on the Fed’s balance sheet even after asset purchases end. In the interim between the end of QE3 purchases and the federal funds rate increase the FOMC could make changes to its reinvestment procedures. Currently reinvestment has a quantitative easing effect and that would continue even after the FOMC ends asset purchases. Discontinued asset reinvestment would likely have similar market effects to asset tapering.
In the FOMC minutes the FOMC discussed influencing economic factors in greater detail. Economic factors affecting the market’s overall health continued to focus on the labor market which is improving and the inflation rate which continues to remain below the FOMC’s objective of 2%. Weak U.S. gross domestic product was also discussed. GDP overall has been lower than most expectations with the first quarter 2014 GDP reported at a -2.9% seasonally adjusted annual rate. In its economic assessment and discussion on GDP the FOMC minutes noted the following influencing factors: industrial production increases in the mining sector, decreases in utilities output, increased outlook on automobile production and sales, the housing sector was reported as subdued and business equipment and intellectual property expenditures were up.
Key components that led to the weak GDP reading were noted as the following: exports, inventory investment, outlays for health-care services, and construction.
Overall the broad markets were up for the day. The DJIA’s 0.47% gain was led by Disney (NYSE:DIS), Cisco (NASDAQ:CSCO), Procter & Gamble (NYSE:PG), Nike (NYSE:NKE) and Chevron (NYSE:CVX). Leading sectors in the S&P 500 included Consumer Discretionary and Energy. Large capitalization stocks outperformed small capitalization stocks with the Russell 1000 gaining 0.46% and the Russell 2000 gaining 0.14%. The NASDAQ was also up for the day adding 27.57 points and gaining 0.63%.