Posted on Thursday, January 3rd, 2013 | In Exchange Traded Funds
Usually just a footnote to a month’s economic reports, the December FOMC minutes raised fears about the future of quantitative easing.
Thursday’s most important economic reports were supposed to be the ADP National Employment Report for December and the weekly report on initial unemployment claims, with the FOMC minutes mentioned as an afterthought. As it turned out, the minutes from the December 11-12 meeting of the Federal Reserve’s Federal Open Market Committee were seen as a possible signal that the Fed might end its quantitative easing – or bond-buying – program. The FOMC minutes revealed that several members “thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet.” Nevertheless, the Fed went ahead with QE 4 and as the minutes indicated, current financial conditions have not improved to the degree that Fed accommodation would no longer be necessary. Beyond that, the Fed noted that the fiscal situation would likely tighten during 2013.
From the report:
With regard to the possible costs and risks of purchases, a number of participants expressed the concern that additional purchases could complicate the Committee’s efforts to eventually withdraw monetary policy accommodation, for example, by potentially causing inflation expectations to rise or by impairing the future implementation of monetary policy. Participants also discussed the implications of continued asset purchases for the size of the Federal Reserve’s balance sheet. Depending on the path for the balance sheet and interest rates, the Federal Reserve’s net income and its remittances to the Treasury could be significantly affected during the period of policy normalization. Participants noted that the Committee would need to continue to assess whether large purchases were having adverse effects on market functioning and financial stability. They expressed a range of views on the appropriate pace of purchases, both now and as the outlook evolved. It was agreed that both the efficacy and the costs would need to be carefully monitored and taken into account in determining the size, pace, and composition of asset purchases.
The ADP National Employment Report for December revealed that 215,000 new jobs were added during the month. Economists had been anticipating that only 150,000 new jobs would be added. A Technical Take on Industrial ETFs with ISM Data Release
The Department of Labor’s weekly report on initial unemployment claims indicated an upsurge of 372,000 new claims – which was 9,000 higher than the 363,000 claims which were expected and 10,000 higher than the previous week’s revised figure of 362,000 initial claims.
From the report:
In the week ending December 29, the advance figure for seasonally adjusted initial claims was 372,000, an increase of 10,000 from the previous week’s revised figure of 362,000. The 4-week moving average was 360,000, an increase of 250 from the previous week’s revised average of 359,750.
The major ETFs expected to respond to the ADP National Employment Report for December, the weekly report on initial unemployment claims and the FOMC Minutes for its Decmber meeting are:
Industrial Select Sector SPDR Fund (NYSEARCA:XLI) +0.05%
Financial Select Sector SPDR Fund (NYSEARCA:XLF) -0.06%
Consumer Staples Select Sector SPDR Fund (NYSEARCA:XLP) -0.31%
SPDR S&P Retail ETF (NYSEARCA:XRT) +0.94%
Consumer Discretionary Select Sector SPDR ETF (NYSEARCA:XLY) +0.19%
Bottom line: Despite accusations of reckless monetary policy, the FOMC minutes from its December meeting demonstrate such a significant degree of concern about the consequences of its bond-buying program, that many have been led to believe that the program is about to end.
About John Nyaradi (http://www.wallstreetsectorselector.com)
John Nyaradi is Publisher of Wall Street Sector Selector: Your Home For ETF Investing! John writes a weekly guest column, John Nyaradi’s ETF Edge for MarketWatch.com and his investment articles have appeared in many online publications including Trading Markets, Money Show, Yahoo Finance, Investors Insight, Fidelity, ETF Daily News, iStock Analyst , among many others. His book, Super Sectors: How to Outsmart the Market Using Sector Rotation and ETFs, is published by John Wiley and Sons and included among the Years Top Investment Books in the 2011 Stock Trader’s Almanac.