Markets Expect Fed to Deliver More Good News for Stocks
Regardless of what Ben Bernanke says at his first quarterly media briefing Wednesday, the markets are convinced the Fed chairman will lay out policies that will keep the stock market rallying and the dollar in decline.
Stocks rose sharply Tuesday, as the two-day Fed meeting got underway, but were mostly flat on Wednesday, ahead of the Fed's midday statement.
The S&P 500 finished Tuesday 11 points higher at 1347, a move that finally erased the last of its late winter losses. The S&P is now up about 7 percent since mid-March. The dollar was lower Wednesday, with the euro edging closer to 1.47 after finishing Tuesday at a new 52-week high of 1.4640.
"I think it's a 'buy the rumor, sell the news' day. The reaction to what the Fed has said has been very accommodative for two years. To think this is the meeting where they stop being accommodative is highly unlikely," said Marc Pado, stock market strategist at Cantor Fitzgerald. "You might see some traders selling into the news, but I wouldn't say that's a 'bail the market' type of reaction."
The Federal Open Market Committee will issue its usual post-meeting statement early Wednesday, at 12:30 p.m. ET, instead of the normal 2:15 p.m. release time.
At 2:15 p.m., Bernanke will address the media and take questions in his first ever media briefing.
The Fed is expected to reaffirm that it will complete its quantitative easing program in June, as expected. The program, under which the Fed is buying $600 billion in Treasury securities, in theory was to have kept rates low while driving investors into riskier assets.
The program has been controversial and criticized, even by some Fed officials. QE has also been credited with driving the stock market and other risk assets higher, and the dollar lower since Bernanke first discussed it last August. It has also been blamed for creating inflationary pressures, which, while real in other parts of the world, are not elevated enough in the U.S. to worry the Fed.
"I think the statement should be pretty plain vanilla, milk toast," said Mark Zandi, chief economist at Moody's Economy.com. "They'll reaffirm they'll complete the QE in June. I think they leave the language regarding the economy's performance and inflation almost untouched. They'll continue to say they'll keep rates exceptionally low for an extended period. The only possible surprise they might have is if they announce they would not reinvest the proceeds of mortgage securities that are maturing. That's the only way they might surprise us."
Zandi, however, said it's highly unlikely the Fed will make changes in that program, and if it did, stocks would come under pressure and the dollar could strengthen.
Traders call the Fed's program to reinvest the proceeds from its expiring mortgages by the name, "QE light," and they expect the roughly $20 billion in monthly Treasury purchases made with the proceeds to be maintained for the time being.
"I think (Bernanke) he's been frustrated by a lot of the criticism and attacks the Fed has received. I don't think he's had a real opportunity to fully explain his thinking about some of the policy steps they've taken," said Zandi. Zandi said Bernanke is likely to choose one main topic to defend, such as the Fed's position on inflation, and the fact it does not look at food and energy prices, both of which have been rising.
The Fed is also expected to release a new midpoint forecast for 2011 GDP, and possibly a new forecast for 2012, to reflect recent weakness in the economy. First quarter GDP is released Thursday and is expected to be below 2 percent by many economists. Zandi expects the Fed's midpoint on 2011 GDP to be 3.3 percent, from the current 3.65.
RBS Treasury strategist John Briggs said if the reduction in GDP is more than about 0.2, the bond market could be surprised. The bond market was trading lower Wednesday morning, with yields rising.
"He's (Bernanke's) going to start educating on the long-term issues, and not provide any short term volatility," he said.
Zandi said he expects to see yields rising longer term as the Fed moves away from QE and gets closer to resuming a more normal monetary policy.
Briggs said he wants to hear Bernanke speak about the sequence of what actions the Fed will take as it unwinds from its easy money policies. "What order does it occur in? I don't know if there's enough agreement on the committee for him to explain that," said Briggs. He noted the Fed could take steps to reduce its balance sheet before it moves its target interest rate from zero, and it could also sell assets after it begins to raise rates.
Brown Brothers Harriman chief currency strategist Marc Chandler said if Bernanke is asked about the sagging dollar, he will probably defer to the Treasury as being responsible for dollar policy and state that dollar weakness is the consequence of programs aimed at helping the economy.
"I think the dollar goes down because the Federal Reserve is making it clear it will push through quantitative easing," said Chandler, adding the other Fed easing programs that will continue after QE ends will also weaken the greenback.
"The real key is when will the market change its focus from the interest rate differentials and divergent trajectories between the U.S. and Europe and when will it shift from that focus to the European debt crisis," said Chandler. He said the European Central Bank's tightening policies should support the rising euro, and it could move to 1.50/1.51.
Rising oil prices have also been heavily correlated to the euro. "The ECB thinks high oil prices are inflationary. If it's inflationary, they have to raise interest rates so high oil prices mean stronger euro," he said.
Pado said the Fed's actions Wednesday and Bernanke's comments should be viewed as bullish by the stock market.
"The bigger picture is the Fed is being very consistent, which the market likes...I expect a correction after earnings season is done by the middle of May. I think you'll see the summer doldrums and the typical 'sell in May' settle in." However, he expects the market to continue rising after that.
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