Ben Bernanke is back on the hot seat tomorrow, when the Federal Reserve Chairman and his committee must word a statement that recognizes the current economic retrenchment, but not to a point that panics the markets.
Existing home sales unexpectedly dropped more than 2 percent in May, according to a National Association of Realtors report today, knocking stocks and raising double-dip fears. This follows a string of weak domestic economic numbers this month related to everything from the consumer to manufacturing.
A week ago, the Philadelphia Federal Reserve’s regional business index came in at an 8, far off a 21 reading that economists had predicted. At the start of the month, a Labor Department report signaled only 41,000 private sector jobs were added.
“For him not to acknowledge the slowdown will be taken by the market that he’s not acknowledging reality,” said Joe Terranova, Virtus Investment Partners Chief Market Strategist. “He’s got to.”
Bernanke was looking at a decent summer not to long ago, as a housing tax credit lifted building numbers and a crisis in Europe put a bid under the dollar. In the FOMC’s last formal statement on April 28th, they said, “growth in household spending has picked up recently.”
That was 10 percent ago for the S&P 500 and 22 percent ago for the SPDR S&P Homebuilders ETF .
If Bernanke sounds too pessimistic, then investors will start to ask themselves a scary question: “What else can the Fed Chief deploy after the already extraordinary monetary steps he’s taken?” With the Fed’s balance sheet technically infinite, the Federal Reserve at some point could resume quantitative easing measures, like purchasing mortgages, but what kind of message would that send to jittery investors.
“Investors should expect some changes in the Fed’s economic assessment,” wrote Marc Chandler, head of currency strategy at Brown Brothers Harriman, in a note to clients after today’s housing figures. “Nevertheless, talk that the FOMC may contemplate renewed quantitative easing strikes us as premature,”
On the other hand, if Bernanke is too bullish on his economic assessment or another member besides Thomas Hoenig signals inflation as a concern, the Fed risks being seen as out of touch, casting a hawkish pall over the market.
Terranova, who is also a ‘Fast Money’ trader, is not taking too many chances given the difficult task at hand for the Fed Chief. He’s getting defensive with consumer staples stocks and is even staying away from gold.
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