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A number of analysts had pegged November or December as a likely time frame for an official Fed announcement for tapering its monthly purchases of $120 billion in Treasurys and mortgage-backed securities, with an eye toward concluding those purchases at in the middle of next year.
*The longer-term outlook for policy interest rates, which currently stand in a range between 0% and 0.25%, now shows benchmark interest rates potentially climbing as high as 1.8% by the end of 2024.*
For markets, worries about China’s indebted property company Evergrande subsided on Wednesday.
*Frankfurt-listed shares of China Evergrande surged 50% after a unit of the company, Hengda Real Estate Group, pledged to make an on-time interest payment on Thursday. Separately, China’s central bank reportedly injected liquidity as markets reopened after a two-day holiday and talk of a restructure of Evergrande has eased some of the initial panic on Wall Street about potential financial contagion akin to what occurred in 2008 when U.S. investment bank Lehman Brothers failed.*
*However, investors remain wary as Evergrande still faces interest payments on bonds in coming days. While the markets are rebounding, we think its to soon to think the Evergrande situation will blow over without causing more near- term market pain. Still, questions remain over whether the interest on Evergrande’s offshore U.S.-dollar denominated bond — also due Thursday — will be made.*
*The U.S. debt ceiling issue also was in focus Wednesday, after a group of former U.S. Treasury secretaries, including Henry Paulson, Timothy Geithner and Robert Rubin, sent a letter to Congressional leadership calling for Washington to avoid an “unprecedented default” that could “serious economic and national security harm.”*
*The House voted late Tuesday to keep funding the government and avoid a shutdown, but faced opposition in the Senate given the Republican party’s opposition to raising the debt ceiling.*
*The New York Federal Reserve Bank on Wednesday also announced it would double the amount each counterparty can park overnight a popular Fed repo facility to $160 billion a day, effective Thursday.*
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In U.S. economic news, investors parsed an August update on existing home sales, which retreated as inventory and prices remained major concerns for prospective buyers. Existing-home sales dropped 2% to a seasonally-adjusted, annual rate of 5.88 million in August, the National Association of Realtors said. Compared with August 2020, home sales were down 1.5%.
But markets still ended the day much higher as the Fed appeared in no rush to hike rates. The Fed is split on the timing of the first interest rate hike. Wednesday’s so-called dot plot of projections showed nine of the 18 FOMC members expect a rate increase in 2022. That’s up from seven in June’s Fed projections.
The market is already pricing in tapering now and have promptly turned their attention to the date of eventual rate lift-off and the pace of rate hikes which, if anything, is a little more modest than markets had feared
Major averages have registered losses for September, a historically choppy month for stocks. The S&P 500 is down 2.8% so far in September, including a 1.7% drop on Monday for its worst day since May. Major averages attempted to rebound on Tuesday but failed with the Dow and S&P 500 finishing in the red for the fourth day in a row. The Dow is down about 3.1% in September.
At the center of investors’ concerns is embattled Chinese property developer Evergrande, which is facing a possible default if it can’t make millions of dollars in debt payments on U.S. dollar-denominated bonds this week. Evergrande’s shares in Hong Kong are down nearly 90% since July 2020 as China cracks down on real estate speculation. Investors worry about a step down in global economic growth if China slows its property market too much or lets Evergrande fail.
Oil prices climbed after U.S. crude stocks fell to their lowest levels in three years as refining activity recovered from recent storms.
By: via @AlliesFin Serve Stock Market
