Investors Ponder Housing Market, Regulatory Restructuring and Inflation/Deflation Fears
Monday saw stocks fall to a three-week low on Wall Street, mostly due to the World Bank’s dismal outlook on the global economy growth. The better than expected housing market report slowed the decline on Tuesday, but failed to regain losses entirely and the day drew to a close with the Dow Jones industrial average falling 0.2 percent, the Nasdaq composite remaining virtually unchanged and the Standard & Poor’s 500 managing a 0.2 percent gain. Prior to the losses recorded over the past week or so, markets had enjoyed a 14 week rally, primarily fuelled by optimism that the economy was on the road to recovery – a viewpoint which now appears to have been premature, or overly optimistic.
Investors and traders will need to digest a substantial amount of economic news on Wednesday, starting with the May durable goods orders report which will be released before the start of trade, followed by the new home sales report for May. With regard to new home sales, potential home buyers are being encouraged to take advantage of a federal program known as the Neighborhood Stabilization Program being run nationwide. Those who qualify can receive a loan of up to $15,000 for the down payment and closing costs of foreclosed homes. The program’s regulators are monitoring states like Arizona, which experienced the fourth highest rate of new foreclosures in May, to see what effect, if any, the program will have. Having been launched in July 2008, the program has been slow in taking off, mainly because due to a lack of understanding as to how it works, an obstacle which authorities are trying to remove.
Also on Wednesday, the House Financial Services Committee will be holding a hearing on regulatory restructuring, the approval of which will have a major impact on the manner in which financial institutions conduct their business. The Federal Reserve will be wrapping up its two-day meeting on Wednesday with an announcement regarding the interest rate policy expected in the afternoon. It is anticipated that the interest rate will remain at current levels; however stock market traders will be keenly interested in what the central bank has to say regarding the bond market, the economy and the outlook for inflation. While consumers are naturally concerned about the affect that inflation will have on them personally, a number of economists and analysts are more concerned about the possibility of deflation, which they say will have a devastating long-term effect on the US economy. Quoting as an example a period in Japan’s history from 1991 to 2000, which has come to be known as the “Lost Decade”, experts draw attention to the many disturbing similarities between events leading up to the economic crisis in Japan and how Japanese authorities attempted to rectify matters through bank bailouts and injecting funds into companies that were deemed to be too big to fail, and what is happening in the United States today.