Stocks Not Expected to Lose Steam – Ahead of Wall Street

Thursday, August 21, 2014

Stocks didn’t lose their winning stride in response to the Fed minutes on Wednesday and the trend is expected to continue today as well. But they will be watching carefully for what comes out of the Jackson Hole speeches, particularly the Janet Yellen speech tomorrow. The question is when will the Fed start raising rates after it concludes the QE program in October and how fast they will go once rates do start doing up.

The Fed Funds rate has not changed from the near-zero level since the depth of the financial crisis in December 2008. The entirety of the Fed’s easing measures since then have been by deploying its enormous balance sheet through bond purchases.

Steady improvements in the labor market and other measures of economic health prompted the Fed to start winding down the latest bond purchase program earlier this year, which is on track to end by the fall. Further normalization involves raising short-term interest rate and letting the Fed’s balance sheet to shrink through maturing securities. The Fed officials appear comfortable with the consensus view of the first rate hike arriving by the middle of 2015.

The U.S. economy’s growth momentum has been erratic in this recovery, particularly in the recent past when a negative GDP print in Q1 was followed by a strong growth number in Q2. But some areas have shown consistent and steady improvements. The labor market would qualify as one of those positive areas, helping bring down the unemployment rate by more than percentage point over the past year to July’s 6.2% rate. This morning’s drop in the initial Jobless Claims numbers to back under 300K means that we can expect monthly payroll gains in excess of 200K in the August payroll report as well.

The Fed implication of this positive labor market momentum would be an earlier than currently expected rate hike. But Fed Chairwoman Yellen and others on the FOMC remain of the view that there was still plenty of slack in the labor market, which made any tightening discussion premature. Labor market remains the key topic at the Jackson Hole conference this year and her speech there tomorrow will likely show her reiterating her position on the topic.

Sheraz Mian
Director of Research

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

To read this article on Zacks.com click here.