MARKET WATCH: Fed stimulus plan lifts crude, equity prices

Equity market and crude prices escalated Sept. 13 after US Federal Reserve officials announced an aggressive plan to stimulate stock prices and to maintain low-level interest rates.

At the end of the Fed’s 2-day monthly meeting, Chairman Ben Bernanke announced an open-ended plan to buy $40 billion of mortgage securities each month until the economy improves. He also announced a third round of quantitative easing (QE3) designed to keep interest rates at record lows through mid-2015.

For nearly 4 years, the Fed has used similar programs to hold its benchmark short-term interest rate near zero while it bought more than $2 trillion in Treasurys and mortgage bonds to reduce long-term rates. Several business analysts and economist have complained QE1 and QE2 were not nearly as effective as the Fed originally projected, and they don’t expect the latest effort to do any better. Even Bernanke acknowledged the latest program is no panacea for slow economic growth and high employment that are likely to continue through next year. But many investors have been calling for the Fed to do something to stimulate the economy.

The Fed has long postponed taking action, however, saying it needed more evidence that stimulus is needed. Announcement of the Fed’s latest effort came less than 60 days before the US presidential election during a heated campaign centered on the troubled US economy, high unemployment, and President Obama’s handling of these issues during his first term of office. However, Bernanke said the Fed’s decision was based solely on the state of the economy and did not consider whether the proposed program would hurt or help any presidential candidate.

The yield on a benchmark 10-year Treasury bond had dipped to 1.73% from 1.79% Sept. 12. However, the yield escalated to 1.84% as investors sold bonds following the Fed’s announcement. Valuation of the US dollar fell slightly against major currencies.

The Fed also lowered its outlook for US economic growth this year to no more than 2%, down from June projections of 2.4%.

The US Department of Labor (DOL) reported Sept. 13 that 382,000 initial applications for unemployment benefits were filed last week, an increase of 15,000 from the previous week. Government officials blamed the gain at least partially on Hurricane Isaac.

The number of US residents receiving unemployment aid fell by 80,000 to 5.4 million in the week ended Aug. 25, according to the latest available data. The decline was credited primarily to many recipients having exhausted available benefits.

The unemployment rate dropped to 8.1% from 8.3%, due to the number of people dropped from unemployment rolls because they have given up on finding jobs. Only 96,000 jobs were added in August, down from 141,000 in July and below a monthly average of 226,000 in the first quarter.

DOL also reported wholesale prices jumped 1.7% in August primarily because of a 13.6% hike in gasoline prices, the largest gain in 3 years. Food prices were up 0.9% and are likely to climb higher in coming months because of the drought across the Midwest.

Energy prices

The October contract for benchmark US light, sweet crudes escalated $1.30 to $98.31/bbl Sept. 13 on the New York Mercantile Exchange. The November contract climbed $1.29 to $98.63/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $1.30 to $98.31/bbl.

Heating oil for October delivery dipped 0.39¢ to $3.21/gal on NYMEX. Reformulated stock for oxygenate blending for the same month fell 3.94¢ to $2.96/gal.

The October natural gas contract dropped 2.6¢ to $3.04/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., gained 2.4¢ to $2.97/MMbtu.

In London, the October IPE contract for North Sea Brent advanced 94¢ to $116.90/bbl. The new front-month October contract for gas oil lost 25¢ to $1,004.50/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes was $113.47/bbl on Sept. 13, up 11¢ from the previous day.

Contact Sam Fletcher at samf@ogjonline.com.

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