Fed Chairman Ben Bernanke's speech in Boston on Friday is by far his most anticipated commentary since, well, August.
That was when the he spoke at the Kansas City Fed's annual symposium in Jackson Hole, Wyo.and tipped his hand on the idea of quantitative easing, which the markets have embraced.
"I think the markets are really geared up for him...no question," said Deutsche Bank chief U.S. economist Joseph LaVorgna. "They're hoping Bernanke is going to be more specific with his perceived intentions and I don't think he's going to say more than he said in August. I don't think he's going to come up with some more creative instrument then he had in August."
The markets widely expect the Fed to announce after its Nov. 3 meeting that it will restart a program of quantitative easing through the purchase of Treasury securities. The idea is to pump money into the system, which in theory would push down lending rates and reflate asset prices. Just the whiff of easing has sapped the dollar, which is down nearly 8 percent against the euro in the last three months.
"I think the Federal Reserve is going to have to surprise the market," said Marc Chandler, senior currency strategist at Brown Brothers Harriman.
"In order to get ahead of the curve and avoid the 'buy the bonds on the rumor of QE and sell them on the fact'...to avoid that, the Federal Reserve has to get ahead of market expectations and that's tricky because they're fueling market expectations," said Chandler. He suggested the Fed could take some other moves, like reduce interest it pays banks on reserves, or target specific levels of inflation or use an interest rate target.
Bernanke speaks at 8:15 a.m. at a Boston Fed conference. His topic is monetary policy in a low-inflation environment. The Fed has indicated it is concerned about inflation being too low, and traders are now watching inflation data even more closely.
They'll get some of that on Friday as well. The Consumer Price Index, ironically, will be released while Bernanke is speaking, at 8:30 a.m. It is expected to show a 0.2 percent increase. "It's (the CPI) is only important in the context of what Bernanke says or doesn't say and whether it's a surprise. If the numbers are in line with expectations, it's irrelevant. If Bernanke doesn't give you any more details on quantitative easing and for some unusual reason, there's an upside surprise, the market might have some indigestion," LaVorgna said.
Traders are also watching retail sales, expected to show a 0.4 percent increase, when reported at 8:30 a.m. The October Empire State survey is also released at 8:30 and consumer sentiment is reported at 9:55 a.m. Business inventories are reported at 8 a.m.
Another big event for markets could come later in the day, when the Treasury is expected to release its semiannual report on currency. The question for markets is whether the U.S. would label China a currency manipulator, after high profile complaints from the Obama Administration about China's reluctance to let its currency appreciate.
"I could see the political forces favoring China to be cited as a currency manipulator. There's a better than 50 percent chance the get cited," Chandler said.
That's a departure from past reports, when analysts saw little chance the U.S. would antagonize China and would prefer to work behind the scenes to change policy.
"The U.S. has very little downside not to press for this," said Chandler.
Google's blow out earnings can't help but give a lift to tech Friday morning. The company reported earnings of $7.64, excluding one time items. Analysts had expected earnings per share of $6.69, Google shares jumped 9 percent after hours. Advanced Micro Devices also surprised on the upside, and its stock was 5 percent higher.
Friday's big earnings report is General Electric, which reports before the bell. GE is the parent of CNBC. Mattel and Infosys also report Friday.
Takeover rumors swirled around tech Thursday, after the Wall Street Journal's report about suitors for Yahoo. But a real potential deal emerged after Thursday's closing bell. Seagate confirmed it is talks to go private.
Stocks ended lower Thursday but recovered losses to close just slightly lower. The Dowwas off 1 at 11,094, while the S&P 500 was down 4 at 1173. Under the surface, however, there were some trouble spots, the biggest of which was banking. Bank stocks were down sharply, in part, on concerns that state investigations into foreclosures and the resulting efforts to fix the processing of foreclosures may end in bigger hits on bank earnings than initially expected.
"J.P. Morgan is the best house in the neighborhood and even that house is on fire," said one trader. J.P. Morgan stock, which declined Wednesday, was down another 2.8 percent.
CNBC's David Faber also reported another factor hurting bank stocks, and that is that the institutions themselves may be on the hook for mortgage loan pools, which may not accurately reflect what they packaged and sold to investors during the hey day of mortgage securitization.
- Follow me on Twitter @pattidomm.
Questions? Comments? Email us at firstname.lastname@example.org