Before The Bell - Stock futures are pointing to a flat-to-somewhat higher opening following a couple of disappointing economic reports this morning. The initial second-quarter GDP reading of 6.5% was less than the 8.5% expected. Initial weekly jobless claims of 400,000 also came in above the 385,000 estimate.
Even so, Wall Street was largely encouraged by yesterday’s decision by the Federal Reserve to leave interest rates near zero. No changes are anticipated on that front until the Fed winds down its asset-buying program. There are no signs of immediate actions to slow or “taper” the combined purchases of $120 billion per month of Treasury securities and mortgage bonds. But the central bank hinted that it would pull back this support once employment levels are closer to where they were before the pandemic.
To a degree, Fed Chair Jay Powell has been vindicated in his desire to keep heavy-duty stimulus measures in place, despite some inflation fears. That is in view of the potential that the Delta variant of the coronavirus has the ability to slow the full reopening of the economy. Regarding inflation, the Federal Reserve is maintaining its position that the higher prices being experienced are largely pandemic related, and should prove temporary.
So far, the bond market has been in tune with the Fed’s view that inflationary trends will mostly pass, given the decline in yields in recent months. A backup in bond yields could still occur if the economy continues to gain steam, and would help certain sectors of the market, such as banks, by improving their lending margins. But higher interest rates, if and when they materialize, might also create competition for stocks.
On Wednesday, market action among the major indexes was mixed. The Dow Jones Industrial Average fell 128 points and the broader S&P 500 edged lower by less than a point; but the NASDAQ gained 102 points.
Word that a bipartisan group of senators reached an agreement toward a $1 trillion infrastructure bill was a broad plus. A higher-than-expected vote tally last night to move the bill forward seemed to confirm the legislative momentum.
Overall, stocks remain near record highs on the strength of the economic recovery, rising corporate earnings, and steady support from low interest rates. But volatility is a factor with stock valuations on the high side and rising expectations for profits. The threat of the Delta variant of the coronavirus and concerns about inflation are also reining in sentiment a bit. Consequently, the upward path for stocks is interrupted from time to time.
Tomorrow, the steady stream of earnings reports will continue, with some of the major oil companies expected to show an impressive turnaround given the pickup in oil prices this year. - Robert Mitkowski