Two things are important right now. Earnings and the Fed. 80% of the S&P companies that have reported earnings have beaten estimates, according to Bloomberg. The catalyst for last week`s 4% rally was the reported earnings, and will continue to be the catalyst this week for any move in the market.
Todays FOMC Statement and Fed Funds rate decision will also play a big role in the market this week. Interest rate is very important in the stock market, and the big question for investors now is when the Fed will start to raise the interest rates. Any hint or insight will likely stir the markets.
Fed Chair Janet Yellen is worried about the low inflation, and the inflation gauge has fallen short of the Fed`s 2% target. The risk of deflation may weight against raising interest rates too soon.
Prices as measured by the personal consumption expenditures index rose 1,5% from a year earlier in August, and oil prices is something Fed has no control over. As you may know, the oil prices has dropped over 20% so far this year.
Many investors expect the Fed to end its third round of asset purchases today, while others say the central bank should consider a delay in ending QE in light of the falling inflation. It is possible for the Fed to reduce the monthly purchases by $10 billion and leave the final $5 billion reduction for December.
The Fed will still hold a record $4,48 trillion balance sheet accumulated during QE 3 despite an end of QE today. That will limit the supply of securities and keep the yield lower as their borrowing cost is limited.
Market volatility and sign of slowing global growth will make the Fed to act with caution, and it`s expected to see the interest rate to near zero for a «considerable time» after bond buying ends. Fed`s benchmark rate has remained at zero to 0,25% since December 2008, but it is expected to see the rate to increase in mid-2015.
FOMC`s next meeting is in December.
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