US Stock Market Overview – Volatility Surges and Stocks Drop as Fed Reveals Bond Purchase Program

Sentiment toward a trade deal declined
David Becker

US stock prices tumbled on Tuesday led down by technology shares. Stocks were on the defensive to start the trading session. Market sentiment soured as the perception is that the trade meetings between the US and China this week are likely to yield little results. The State Department announced that it was putting visa restrictions, certain Chinese persons, ahead of this week’s meeting between US and Chinese negotiators.

Volatility Surged

Volatility was generated by Fed Chair Jerome Powell announced that the Federal Reserve will soon increase its purchases of short-term Treasury securities in order to reduce the strains experience in September that rattled the short-term lending market. The VIX volatility index surged higher on Tuesday rising 14% and closing the trading session above 20.

Bond Buying is Back in Vogue

Although the Fed said it would stop allowing bonds to roll out of its portfolio earlier this year it never agreed to purchase bonds until today. Fed Chair Powell said that the Fed would begin to buy bonds and try to avoid any recurrence of the strains experienced in money markets last month. Fed officials stopped shrinking the assets on its balance sheet in August. The lack of liquidity could generate a blowout of the libor rate which is a warning sign that the lack of liquidity could begin to weigh on riskier assets. For months, officials have said they would someday allow reserves to grow again, which would require the Fed to increase its purchases of Treasury securities.

Producer Prices Fall in September

The Labor Department reported that the PPI for final demand dropped 0.3% last month, weighed down by decreases in the costs of goods and services. That was the largest decline since January and followed a 0.1% gain in August. On a year over year basis, PPI increased 1.4%, the smallest gain since November 2016, after rising 1.8% in August. Expectations had been for PPI to rise 0.1% in September and advancing 1.8% year over year. The core PPI which excludes food and energy was unchanged last month after jumping 0.4% in August. The so-called core PPI increased 1.7% in the 12 months through September after climbing 1.9% in August.

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