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Friday, September 12, 2014

Morning MoneyBeat: The Fed's Two Most Important Words

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Morning MoneyBeat US

Morning MoneyBeat: The Fed's Two Most Important Words

By Steven Russolillo

Morning MoneyBeat is the Journal's pre-market primer packed with market updates, insights and must-read news links. Send us tips, suggestions and complaints: steven.russolillo@wsj.com
MARKET SNAP: At 6:05 a.m. ET, S&P 500 futures down 0.03%. 10-Year Treasury yield higher at 2.56%. Nymex up 38 cents at $93.21. Gold $1 lower at $1238. In Europe, FTSE 100 up 0.1%, DAX down 0.2% and CAC 40 down 0.1%. In Asia, Nikkei 225 up 0.3% and Hang Seng down 0.3%.
WATCH FOR: August Retail Sales (8:30 a.m. Eastern Time): seen +0.7%; previously unchanged. August Import Prices (8:30): seen -0.9%; previously -0.2%. September Consumer Sentiment (9:55, preliminary): seen 83.0; previously 82.5. July Business Inventories (10:00): seen 0.4%; previously +0.4%. Darden Restaurants is scheduled to report quarterly results.

THE BREAKFAST BRIEFING

A debate is brewing over how the Federal Reserve will craft its language in next week's policy statement, with all eyes on two key words.
The Fed since March has said it will keep interest rates steady for a "considerable time" after its bond-buying program–known as quantitative easing–comes to an end. With QE on track to conclude next month, the question now is what exactly does a "considerable time" mean?
As the economy has improved, some market watchers think it's time for the Fed to drop that language now in order to prep Wall Street for an eventual rise in interest rates. Others think such a move next week would be premature.
No matter when it occurs, an eventual shift in language could cause turbulence in markets, with investors viewing it as a sign that the Fed is getting closer to tightening monetary policy.
The Fed's two-day meeting, which concludes Wednesday afternoon, should offer more clarity on the situation.
"At this point, we've had more conversations about the Fed in the last two weeks than in the preceding two months," Dan Greenhaus, chief strategist at BTIG, wrote to clients Thursday evening, noting the big debate centers around the "considerable time" language. "For some clients, the fuss over a few words seems overdone," he said. "At the same time, Fed language is a tool and an adjustment to that language should be something we watch."
U.S. stocks have stalled in recent days, although the Dow Jones Industrial Average still sits above 17000 and the S&P 500 lies less than 1% from its all-time high. A recent rise in U.S. bond yields has been cited as one of the factors causing stocks to struggle over the past week. The yield on the benchmark 10-year note slipped to 2.531% on Thursday, snapping a five-session string of gains.
The moves have all occurred as the debate about the Fed and interest rates has heated up.
The economy is still "several months away" from a rate increase, Mr. Greenhaus said. However he pointed out the last time the Fed started raising rates came in June 2004. Back then, the central bank changed the language in its policy statement only one month earlier.
Few expect a repeat this time around. Almost all market watchers see the Fed taking a slow and deliberate stance before its first rate increase.
But as Wall Street preps for such an event, Mr. Greenhaus says investors shouldn't expect markets to remain as calm as they have been over the past several months.
"The shift from accommodation to policy tightening will almost surely result in broad market weakness, however temporary it may be," he said. "While we've been generally bullish on equities these last few quarters, it's hard to imagine the coming four quarters will echo recent gains."
Morning MoneyBeat Daily Factoid: On this date in 2003, the country singer, songwriter and actor Johnny Cash passed away. He was 71 years old.
-By Steven Russolillo; follow him on Twitter @srussolillo.

STOCKS TO WATCH

Ulta Salon Cosmetics & Fragrances Inc. shares surged in the extended session Thursday after the beauty-products retailer topped Wall Street earnings forecasts and raised its guidance for the year. Shares of Conversant Inc. jumped 32% to $35.14 on heavy volume after Alliance Data Systems Corp. said it would buy Conversant for $35 a share.
Darden Restaurants Inc. reports earnings at 7:30 a.m ET. Analysts expect earnings per share of 33 cents on revenue of $1.59 billion.

MUST READS (LINKS)

U.S. Allies Pledge to Help Fight Against Islamic State: "Washington's international allies didn't make clear how far they would go to join military operations even as they pledged their support."
Hillary Clinton Faces Skeptical Iowa Voters: "It was Iowa that punctured Hillary Clinton's bid for the presidency in 2008. If she runs again, it looks like she still has work to do there."
Heard on the Street: Economy in Mirror Bigger Than it Appeared: "A faster-than-expected rise in health-care spending in the second quarter might prompt some rethinking about the economy's growth potential."
Economists See Overseas Risks as Growth Wild Card: "After an uneven first half of the year, most economists are relatively sanguine about the U.S. economy's growth outlook. It's the rest of the world that's a concern, according to The Wall Street Journal's monthly forecasting survey."
Severing Scotland Is No Easy Task: "Independence from the U.K. would require the resolution of a host of issues, from currency and oil to salmon and sports."
Activist Investors Build Up Their War Chests: "CEOs, beware: Activist investors who target America's corporations are gathering more ammunition."
Salt the Pasta Water: Starboard Value's Suggestions for the Olive Garden: "When cooking pasta, use salt. And go easy on the breadsticks. Those are two of many steps Starboard Value LP said late Thursday it would take to boost the value of Darden Restaurants Inc., owner of Olive Garden, if the activist hedge fund was to win control of the entire board."
Dimon Opens Up on Cancer Treatment: "J.P. Morgan Chase Chief Executive James Dimon is finishing up treatment for throat cancer and is making good progress while missing little time in the office. He next begins difficult weeks of recovery and waiting."
Brett Icahn Cancels Plans to Start Hedge-Fund Firm: "Carl Icahn's son, Brett Icahn, has canceled plans to start a new hedge-fund firm, people familiar with the matter said."
Alibaba: A Big Deal, But Is It a Steal?: "Salespeople at banks working on Alibaba's IPO say the initial price range for the shares values the company at a discount to rivals such as China's Tencent."
Expats Left Frustrated as Banks Cut Services Abroad: "Americans living abroad are being cut off by banks and brokerages as financial institutions seek to steer clear of a U.S. crackdown on money laundering and tax evasion."


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