MARKETWATCH: October 18 - 22

Most of the week, markets continued to reflect expectations that the Fed would increase its purchases of Treasury securities (known as quantitative easing round two, or QE2) to support the weak economy. The decision is widely anticipated to come at the Fed’s monetary policy group meeting (the Federal Open Market Committee or FOMC) in early November. With nearly all other major central banks tightening at the same time the Fed is expected to go in a different direction, the dollar has headed lower against most major currencies and, as part of the global currency moves, global traders shifted out of Treasuries at the margin. While bonds didn’t hit an all-time low, yields were pretty low. (The 30-year bond had gone below 4 percent in recent trading.)
But a new wrinkle appeared: while the markets had priced in expectations of considerable QE2, questions started to be raised during the week about whether the Fed would take giant steps or small steps, based on remarks by a top Fed policymaker. With uncertainty about the Fed’s next moves arising during the week, bonds reversed course and yields rose.   
By the end of this week, another new wrinkle appeared front and center to make markets cautious as we head into the weekend. The Group of 20 Finance Ministers meet in Korea today and tomorrow; and whatever they decide (if anything) will be followed up by a meeting of the heads of government in November. (The G-20 countries represent most of the world economy.) The basic worry is that currency wars will erupt, as countries try to maintain growth through competitive devaluations as they embark on fiscal consolidation programs. Global trade wars are considered by many experts to have played a major role in the Great Depression of the 1920s and 1930s. But, global imbalances persist and are a root cause of our economic and financial crisis. The US, as a large debtor nation, is considered to be part of the problem. It’s not all about China.
There was no major economic data news during the week, although continuing worries over the mortgage market mess remain (highlighted by the latest Fannie and Freddie projections under different housing scenarios and news of ongoing efforts on the legal front). Weekly employment claims, although showing a slight improvement, still give a picture of underlying weakness for awhile. Some company profit reports have been better than expected, but the fundamentals are hard to interpret.