Daily Market Commentary for October 04, 2011

S&P 500 striking 1,090 - technically, we are in a bear market just 4 days into the month of October.
(read more at Millennium-Traders.Com)
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Federal Reserve Board Chairman Ben Bernanke said in testimony prepared for the Joint Economic Committee of Congress that a close reading of recent economic data shows no hint of improvement ahead for the weak U.S. labor market. “Recent indictors, including new claims for unemployment insurance and surveys of hiring plans, point to the likelihood of more sluggish job growth in the period ahead,” Just last week, Fed Boss called the weak labor market a national crisis. Overall, the economy should pick up from the tepid 0.9% average growth rate of the first six months of 2012. There remain however, some persistent factors which continue to hold back growth. Fed officials are now expecting a somewhat slower pace of growth than they were anticipating in their last formal forecast released in June. At that time, Fed officials said they expected growth in the range of 2.7%-2.9% in 2011 and then rising to 3.3%-3.7% in 2012 and, had expected unemployment rate to dip to a range of 8.6%-8.9%. Fed officials plan to release an updated forecast after their next policy meeting on November 1-2. In his testimony in front of Congress, Bernanke said the Fed’s Operation Twist should put downward pressure on longer-term interest rates and “help make broader financial conditions more supportive of economic growth.” Last month, the central bank pledged to swap $400 billion of short-maturity government bonds into longer-maturity ones and also said it would reinvest proceeds from maturing securities into mortgage-backed securities. Bernanke also said it remains “difficult to judge” how much the financial strains of the European debt crisis have affected U.S. economic activity thus far. “But there seems little doubt that they have hurt household and business confidence, and that they pose ongoing risks to growth,” Bernanke said. As expected, inflation has begun to moderate as the central bank expected. The Fed is prepared to take further action “as appropriate” to promote a stronger recovery but central bank policy is not a panacea for the problems currently faced by the U.S. economy. “Fostering healthy growth and job creation is a shared responsibility of all economic policy makers, in close cooperation with the private sector,” Bernanke said. Fiscal policy is important but “a wide range of other policies, pertaining to labor markets, housing, trade, taxation, and regulation, for example, also have important roles to play,” Bernanke said. "We would make sure we would stand ready to provide as much liquidity against collateral as needed as lender-of-last-resort for our banking system" Bernanke said. While the Fed does not "anticipate" the need to start such a program, "we will certainly be prepared to respond if anything eventuates," Bernanke said. Of course however, the Fed would need the approval of the Treasury Secretary before starting such a program. The Dodd-Frank law stripped the Fed's power to prop up ailing financial firms, as it did in the rescue of American International Group (AIG) in 2008. Bernanke said U.S. banks have minimal exposure to the periphery of the euro zone. U.S. money market firms have somewhat larger exposure but, they have also moved to "core" countries like France and Germany. "So it isn't so much the direct exposures that concern me," Bernanke said. Market uncertainty about Europe has created enormous volatility that is impacting the U.S. recovery, he said.

Per the Commerce Department today, factory orders fell 0.2% to $451 billion in August. July's gain was revised to 2.1% growth from an initially reported 2.4% gain. During the month of August, shipments fell 0.2%, unfilled orders rose 0.9% and inventories increased 0.4%.

A bill authored by Rep. Peter Roskam, an Illinois Republican, would permanently cap capital gains and dividend tax rates at 15%. President Barack Obama and top Democrats reportedly will not go for it though. Altria, AT&T, the National Association of Manufacturers and Xcel Energy are backing the bill, suggesting Corporate America is digging in for a long lobbying campaign. Obama and Democrats want to allow the Bush-era tax cuts to expire at the end of 2012 which includes taxes on capital gains that would rise from their current 15% to 20%. Taxes on dividends would go up to 39.6%, more than double what they are now. Roskam, a member of the Republican leadership, argues that keeping rates low will help keep businesses competitive. “If we don’t act, Americans who rely heavily on these current rates, from seniors to businesses to investors of all kinds, will be severely negatively impacted,” he said. Obama and Democrats argue that higher rates are needed to help close the gaping U.S. budget deficit with Obama’s deficit-reduction plan expected to raise about $1.5 trillion in new taxes.


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