Fed Chairman Ben Bernanke wrapped up a second day of Congressional testimony Thursday. "What we do know with more certainty is that in September the Fed is going to slow its asset purchases," said Barry Knapp, head of equity portfolio strategy at Barclays.
Bernanke reaffirmed the Fed would be watching economic data but that it could reduce its $85 billion in monthly bond purchases by the end of the year. The Fed's discussion of tapering has taken rates higher, off the low of 1.62 in early May to as high as 2.75 percent this month.
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"I never thought earnings by themselves were going to be that significant," Knapp said. "I think there's some things going on underneath the surface that are interesting. If you look at the markets and how they're reacting to the whole Bernanke thing, the little rebound in the Treasury market has run its course and it will probably start bleeding again. That is not surprising to me."
Yields rose Thursday as investors sold bonds, and the 10-year Treasury yield crossed back above 2.5 percent. It traded in a range from 2.46 to 2.53 percent late in the day.
Knapp expects stocks to struggle against rising rates, which will also take their cue from an improving economy, apparent in the fact oil is at 16-month high and manufacturing data is picking up, he said.
"The U.S. looks like underlying momentum is improving. On the surface, it's good news for the equity market, but that implies tighter Fed policy," he said. "As the data gets better, all of a sudden the market wakes up—the equity market in particular—that the Fed is going to taper purchases. The market comes back under pressure," he said.
Knapp said the market will react to the tightening policy in selling waves, as it has in the past.
There are just a few earnings Friday. They include General Electric—significant, as traders consider it a kind of proxy for the S&P because of its exposure to many industries, both domestic and international. Honeywell, Baker Hughes, Whirlpool, SunTrust, State Street and Kansas City Southern also report.
"So far this quarter, domestically oriented stocks have been outperforming," Knapp said. "This quarter, domestic revenues are starting to go up, which makes perfect sense given those stocks have been telling you that for six months. Companies with foreign-derived revenues remain under pressure."
Besides corporate earnings, markets will be keeping an eye on G-20 finance ministers, meeting in Russia on Friday and Saturday. Treasury Secretary Jack Lew will be in attendance.