Any number of headlines Wednesday could knock stocks out of their side ways trading pattern, but the Treasury market is the one to watch as the Fed winds down its two-day meeting.
Other big news of the day will be the 8:30 a.m. release of first quarter GDP; the latest swine flu developments and some major earnings and annual meetings. President Obama, marking his 100th day in office, holds a press briefing at 8 p.m. where he is expected to update the progress of his economic programs.
From 'Fast Money':
Bank of America holds its shareholder meeting at 9 a.m. in Charlotte, where CEO Ken Lewis is expected to come under fire for his handling of the Merrill Lynch acquisition.
On Tuesday, California's influential employee pension fund Calpers joined other institutions, saying it would cast its 22.7 million shares against the Bank of America board and Lewis. At the same time, the Wall Street Journal Tuesday reported that the government's stress tests concluded that Bank of America and Citigroup need more capital.
The stock market was barely changed at the end of the day Tuesday though financials were down 1.8 percent. The Dow finished off 8 points at 8016, and the S&P 500 slipped just 2 points to 855 as U.S. stocks took the spread of swine flu in stride, for now.
Treasurys were hit by the prospect of massive new supply, in a week where $101 billion in notes are being auctioned. A record $35 billion in 5-year notes was well received Tuesday. Yet, another $26 billion in 7-year notes looms for Wednesday. The 30-year, under pressure most of the day, lost two points, which pushed its yield to 3.97 percent, the highest level since November. The 10-year's yield crept above the key 3 percent mark, finishing at 3.01 percent.
"There's a nasty rumor out there saying the long bond is going to go monthly, off of the next refunding," said Michael Franzese, who heads the government desk at Standard Chartered. Another recurring rumor circulated that the Treasury was planning a 50-year. "I don't believe there is going to be a 50-year. I think that's bogus," he said. Franzese said traders turned their focus away from concerns about swine flu hitting the global economy and focused instead on supply.
The Fed wraps up its two day meeting with a statement at 2:15 p.m. Some traders are hoping for more clarity from the Fed on its Treasury purchase program.
Brian Edmunds, Cantor Fitzgerald head of interest rate trading, said the current dynamic of how the Fed purchases Treasurys and the Treasury issues massive amounts of new debt is working at odds. He said the Fed should change its procedures. "They want the markets to know what's going on, but if you're going to have a purchase plan of Treasurys that's going to impact the market, I don't think you can telegraph the purchases as much as they have," said Edmunds. Traders are also awaiting a quarterly refunding announcement from the Treasury Wednesday.
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Franzese though said he thinks the Fed will take on the rise in rates in its statement. "I think they have to reiterate their policy of keeping rates in check," he said.
But Deutsche Bank chief U.S. economist Joseph LaVorgna said he thinks if the Fed says anything, it will be about the economy. "They're going to keep their cards close to the vest this time and maybe acknowledge things are a little bit better," he said.
What Else to Watch
Economists are expecting the first quarter GDP report to show a steep decline of about 4.6 percent, but less than the fourth quarter decline of 6.3 percent. LaVorgna says his expectation, however, is for a decline of 8 percent.
"Hours worked were down nearly 9 percent, and we know productivity didn't go up," he said. "In my forecast, I'm going to have more inventory liquidation than somebody else. The big discrepancy between me and the street is probably consumption. I have a small decline, and they have an increase, but that wouldn't account for the full difference."
LaVorgna said the improvement in Tuesday's consumer confidence numbers is reflecting in part good feelings from the stock market's roughly 28 percent move up since early March. The Conference Board's consumer confidence index soared to 39.2 for April, from March's revised 26.9, its highest reading since November and well above the 29.5 expected.
"We're really hanging ourselves on this equities rally. It's amazing how much it's affecting the data ... the purchasing managers, the NAHB, consumer confidence. All of these numbers improved, and it's just an equities story. They tend to be sentiment gauges and sentiment is very important, but disappointment this time could be very damaging," said LaVorgna.
Stocks have lost very little ground this week even as Mexico's swine flu outbreak appears to be spreading to the U.S. and Europe and Mexico's already fragile economy ground to a halt. LaVorgna said he expects that if the flu is like the SARS outbreak, economic recovery could be delayed. "This at the margin is going to to cause the recovery to be delayed a bit. If it turns out to be as serious as SARS,it's going to have an impact on the data for at least a month or two," he said.
Stock traders continue to debate whether the market will pull back after its seven-week rise though many see the March lows holding. Peter Costa of Empire Executions said consumer confidence was an encouraging factor for stocks Tuesday.
"There's a lot of reasons why you have to hate the market. Look at the banks. Look at the financials. It's a mixed bag today. Those consumer numbers are not going up but they're firming ... The market is always reacting six months ahead," said Costa.
"I don't think we'll sell in May. I think we'll hang in here for another couple of months," said Costa. "We're going to be in a narrow trading range for some time.. Longer term, any time there's a dip, I buy."
There are a number of earnings Wednesday, including Royal Dutch Shell, Baker Hughes , Aetna , Time Warner , Southern Co , Wyeth , Waste Management and General Dynamics . After the bell, reports are expected from AFLAC and Starbucks .
Energy and commodities were among the first markets to feel the brunt Monday of fears that swine flu will hurt an already broken world economy and delay any recovery. But the selling pressure eased up, and oil on NYMEX fell just $0.22 to $49.92 per barrel.
"With the inventories being where they are, we've been looking for a catalyst in the range we've been hovering in - between $48 and $52," said John Kilduff of M.F. Global. "To see Mexico City with no cars is a pretty stark picture."
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The Department of Energy releases inventory data for oil and gasoline at 10:30 a.m. Wednesday. "We're looking for a slight build across the board. We're so full up on crude oil that that shouldn't make much difference. If the build in gasoline though ends up being sizeable, in the face of low refining runs, that will be trouble for the gasoline bulls, but good news for consumers."
Grains recovered some ground Tuesday, but hogs fell to contract lows even though there is no evidence hogs are connected to the outbreak of swine flu. Copper, watched as a meter for global growth, fell 3.5 percent.
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