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Wednesday Look Ahead: Fed speak, the Road to 11,000 and the 10-Year Auction?

Comments from the current and former Fed chairmen may spice up an otherwise quiet day for economic news.

Former Fed Chairman Alan Greenspan should get the most attention, when he appears first thing in the morning before the Financial Crisis Inquiry Commission on the first of its three days of hearings touching on the housing crisis, regulators and Wall Street. Greenspan, criticized for missing the housing bubble, will no doubt defend the role of the Federal Reserve. Fed Chairman Ben Bernanke speaks at an unrelated event later in the day at the Dallas Regional Chamber. He will speak at 1:30 p.m. on economic challenges "past, present and future."

The Financial Crisis Inquiry Commission, a 10-member panel appointed by Congress, is expected to issue a report on the financial crisis by Dec. 15. The hearings this week will explore the roles of subprime lending, securitization and Fannie Mae and Freddie Mac. Former Citigroup CEO Chuck Prince and former Citigroup executive and Treasury Secretary Robert Rubin testify Thursday.

More Fed speak will come from New York Fed President William Dudley, who appears at 12:15 p.m. at the Economic Club of New York, and Kansas City Fed President Thomas Hoenig, who speaks at 2 p.m. in Santa Fe.

Stocks started the day Tuesday on negative footing, but ended mixed after getting a lift from the minutes of the Fed's last meeting. The FOMC, at its meeting, discussed its statement language about the "extended period" for extremely low interest rates, but it made no move to change that language. Barclays economists, in a note, interpreted the minutes to say "'extended period' means neither 'extended' nor 'period'" and it is possible the language will now stay in place until the FOMC is relatively sure it will soon be tightening.

The Dow lost 3 points to 10,969, a short distance from 11,000. The S&P 500 gained 2 to 1189. The VIX, the CBOE's volatility index and a meter for investor fears, dropped to its lowest level since October, 2007. The VIX finished the day at 16.23, down 4.6 percent.

Crude oil gained $0.22 per barrel, to $86.84, while gasoline futures slipped $0.19 per gallon to $2.3483. The Energy Information Administration forecast crude oil will average around $81 per barrel this summer, and gasoline at the pump will average $2.92 per gallon during the summer driving season.

Stocks in Bondage?

U.S. Treasury prices reversed some recent declines Tuesday, as concerns about Greek sovereign debt again spread across world markets. The Treasury's auction of $40 billion in 3-year notes went smoothly, and traders said it was a strong auction.

The market has now shifted focus to the Treasury's auction of $21 billion of 10-year notes Wednesday at 1 p.m. The yield on the 10-year Treasury was 3.96 percent, down from Monday when it crossed 4 percent for the first time since last June.

"The real litmus test in my mind is the 10-year because it's so important. It's tied to all facets of the U.S. economy...If it does come in negative, I'll reassess my game plan but for now the 4 percent yield is drawing in investors and that's a good sign," said George Goncalves, head of rate strategy for the Americas, at Nomura.

"There was a little bit of a boycott (at auctions) last month because rates were so low..now that we have cheapened up the market, we'll see where we go from here. Yields should rise on the back of growth expectations which we are seeing -- positive economic data, but there are limitations on how far (rates) can go without weighing on the economy," he said.

Goncalves said he expects the market to take the 10-year auction in stride. "I don't think we'll get a repeat but we should have decent demand tomorrow and the rate fears will go away," he said.

If not, however, markets could realign if rates continue to rise. "I think if we get meaningfully above 4 percent, after the big run up in stocks, there should be signs of asset allocation moves," he said.

Greek Drama

Reports that Greece was backing away from the IMF sent jitters through financial markets and pushed the dollar 0.6 percent higher against the euro, to a level of $1.3405 per euro. The dollar was off 0.5 percent against the yen.

Robert Sinche, chief strategist at Lily Pond Capital, said he thinks the Greek problem will continue to spook markets. "Here Greece has debt that is above 100 percent of GDP, estimates are at between 110 and 115 percent...their interest rate that they have to accept on new debt issuance is substantially higher than the normal growth rate of the economy," he said. After the recession, he said if Greece had growth of 2 to 3 percent, it would still be paying an interest rate of 6 percent or so.

"It's not going to go away. I think the markets are a bit concerned about the mixed messages," he said. Greece is expected to launch a multibillion U.S. dollar bond in attempt to attract a broader group of investors.

Sinche said one positive for markets is the progress the U.S. appears to be making in cooling tensions with China. On the weekend, the Treasury said it would delay the April 15 report that could have labeled China as a currency manipulator. China's unwillingness to let its currency float has been a point of contention with Washington, and some members of Congress would like to see China named as a currency manipulator and take trade sanctions against it.

"Our view is they have internal reasons to want to start adjusting monetary policy, and that the core of their monetary policy is really the fixed exchange rate regime. If you look at an economy growing as rapidly as theirs, if it was a free open economy, they would probably want to have interest rates at 9 to 10 percent range as opposed to half or quarter of that," he said.

"They don't want to let interest rates go up because they're afraid that might attract more capital inflows so they keep rates artificially low...in our view, a lot of the distortions in domestic monetary policy really originates from the exchange rate regime," said Sinche, adding the central bank recognizes it needs greater policy flexibility.

Sinche said Treasury Secretary Timothy Geithner seems to have moved the timing on China's currency decision out to the end of June, when the G-20 meets. Sinche expects China to take a bolder step when it adjusts its currency, rather than the 2 percent move it made last time. It may also peg the currency to a basket of currencies. "We thought they'd be moving in the second quarter," he said.

"Central banks around the world are moving away from their emergency policies. China could be part of that process," he said.

Retail Sector a Bright Spot?

Sinche said the seeming progress around China's currency seems to be part of a bigger breakthrough in U.S. dealings with China. For instance, China has agreed to discuss U.N. sanctions against Iran, President Hu will be visiting Washington this month for a nuclear summit. Also, President Obama spoke at length with President Hu in a phone call last week. "That may have been in a sense a breakthrough conversation..The U.S. is potentially engaging China in the environment in which China likes to engage and they will likely get results," he said.

The Obama Administration may also be able to act as the "good cop" to the Congressional "bad cops."

"I think what we've done now is they restarted the clock and wiped the slate clean and said let's rethink these things on a broader basis," he said. So now, all the points of contention between the two countries - Tibet, Taiwan, Iran and trade, are now part of a broader dialogue.

Bright Spot

Traders have been looking ahead to the monthly sales reports from chain stores this Thursday. Those reports will show whether the better-than-expected sales activity in February carried through to March. On Tuesday, two weekly reports gave an early look at last week's pre-Easter weekend shopping activity. The International Council of Shopping Centers reported sales rose 4.7 year-over-year, the best improvement since April, 2007. Johnson Redbook reported sales rose 5.2 percent.

Tony Crescenzi, senior portfolio manager at Pimco, said in note that the sales improvement adds evidence to a pickup in final demand, which will pressure U.S. companies to increase output because of their tight inventories, slowing delivery times and increased backlog. "Increases in output at this stage of the cycle are more likely to be accomplished through increased hiring, because companies have squeezed about as much out of their existing workforce as they can - productivity in the three quarters ended December increased at the fastest pace for any three quarters since 1958," he wrote in a note.

Thomson Reuters says analysts forecast the retailers in its survey will show a 6.3 percent sales increase for March, compared to a 5 percent decline last year. Discount stores are expected to do best, scoring a gain of 8.5 percent, and department stores are seen gaining 8.2 percent. The worst performers are expected to be drug stores, up just 0.8 percent, the same as last year.

Retailers Family Dollar and Bed Bath and Beyond are among companies reporting earnings Wednesday. Monsanto also reports earnings.

Also in corporate news, General Motors will give a financial update to analysts at 10 a.m.

Questions? Comments? Email us at marketinsider@cnbc.com

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

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