Dollars and Sense: The Fed's still wagging the Wall Street dog

Earnings season begins. This week began earnings season on Wall Street, but you’d hardly know it. Alcoa kicked off reporting on second quarter results with a good report on Monday evening. By good report I mean it beat (by a penny a share) low expectations. The markets did go up after Alcoa announced, but the rise on Monday and Tuesday had more to do with factors other than earnings, including news from the Federal Reserve, which released the minutes from its June Federal Open Markets Committee meeting.

Still wagging the dog. The stock market has almost become a prediction market for when the Fed will end its $85 billion monthly bond-buying program. If we get news this program will end or slow soon, the market goes down, even if that news is good news. That’s why sometimes bad news, which should drive the markets down, can send them up. Conventional wisdom about when the Fed’s bond-buying program will end changes daily, but a Reuters poll of economists predicts September. Others are not so sure. Bob Brusca, with Fact and Opinion Economics, says he doesn’t think the underlying fundamentals of the economy are strong enough to support that move.

Mixed news. Brusca is right that the underlying economic news has been mixed at best. Interest rates have jumped sharply in recent days, with the yield on the 10-year U.S. Treasury note touching 2.7 percent. Higher rates make borrowing more expensive and stocks less attractive. It also could spark inflation fears. On Wednesday, we got a report saying new mortgage activity was down 3 percent last week, in part because of those higher interest rates. Also discouraging the markets were data indicating that imports and exports from China fell more than 3 percent. It was the second month in a row for China’s import-export activity to disappoint, and because the country’s economy has grown so large and so fast, bad economic news there now causes global ripples.

Jobs picture also mixed. The jobs picture continues to be muddy, at best. On Thursday, the weekly report on initial claims for unemployment benefits jumped to 360,000, a two-month high. It also inched back above the “magic number” of 350,000. A number below that level indicates consistent job growth. And, of course, last week we learned that unemployment is stuck at 7.6 percent, still pretty high when we’re supposed to be in a recovery.

The week ahead. So what does the week ahead look like? We’ll get reports on retail sales and business inventories today. And earnings season will be in full swing. We’ll also see reports on housing starts and building permits, and on Thursday, the leading economic indicators. So it’s a pretty heavy week. That means it’s possible the markets might move for reasons other than what comes out of the mouth of Fed Chairman Ben Bernanke, and that would be a welcome change.