Markets will be watching three major policy speeches Thursday, including President Obama and Fed Chairman Bernanke, but the speaker that may be most dramatic may be out of Europe.
European Central Bank President Jean-Claude Trichet speaks after the ECB's 7:45 a.m. ET rates announcement, and the ECB is expected to reverse its five-month old tightening policy due to a weakening economy and lingering sovereign debt crisis. Fed Chairman Ben Bernanke then speaks on the economy and takes questions at 1:30 p.m. ET before the Minneapolis Economics Club. Finally, President Barack Obama unveils his much-anticipated plan to create jobs before a joint session of Congress at 7 p.m.
Volatile European markets have been setting the course for world markets, and investors will also be watching to see whether the ECB will continue purchasing sovereign bonds. ECB purchases of Spanish and Italian bonds helped soothe troubled markets when the program began last month.
Brian Dolan of Forex.com said Trichet is not likely to be very direct in declaring an end to the tightening policy the ECB is expected to give up. But if he is especially dovish, the euro could see some selling pressure. Euro zone countries will also be voting to extend the powers of the 400 billion euro bailout fund (EFSF) over the next several weeks, and analysts say the fund is too small to solve all the sovereign debt problems in Europe.
"Will they continue to buy bonds, along side the EFSF (European Financial Stability Facility)? Or will they step back? He'll give a sense of what the ECB's position is. They were reluctantly buying these government bonds, but they were the only entity up and running," said Dolan.
Bernanke is likely to continue teasing markets with a promise the Fed will discuss its easing options at its two-day meeting next week. Bernanke is not seen veering from his recent remarks at the Jackson Hole Fed symposium last month.
"Any strong signaling of a pre-ordained policy preference in tomorrow's speech could be seen as front-running the (FOMC) committee and at odds with the spirit of collegiality," said J.P. Morgan economist Michael Feroli in a note Wednesday. But traders are hoping to see some clarification of Bernanke's views in the question and answer period that follows.
"Bernanke's speech tomorrow is important because I think we're going to get some of the near term justification for more policy steps. We don't want policy steps where the lower dollar is the transmission mechanism. We don't want them to expand the balance sheet and do a QE3 (quantitative easing)," said Barry Knapp, Barclays Capital head of equity portfolio strategy.
Knapp said it would make sense for the Fed to extend the duration of the securities it is holding in its portfolio, known in the market as "operation twist."
"I would like to see them simplify it — sell Treasurys and buy mortgages," he said. "You could get credit spreads to tighten."
He said the spread on the Barclays U.S. credit index (options adjusted) has gone from 141 basis points above Treasurys at the beginning of August to 194 basis points, its highest level since September, 2009.
Jobs, Jobs, Jobs
President Obama is taking aim at one of the thorniest issues in the economic recovery — the painful lack of job growth and a 9.1 percent unemployment rate. He is reported to be seeking as much as $300 billion in infrastructure investments and tax cuts to inspire hiring. The plan comes days after the government's monthly employment report showed that on a net basis, absolutely no new jobs were created in August.
Stocks soared Wednesday, as Europe's markets rose after a German Constitutional Court upheld the first Greek bailout package. Later, the Italian senate approved new austerity measures. But in the U.S., both Bernanke and Obama were given some credit for the more than 2.5 percent gain in stocks.
Knapp said he thought the prospect of a new U.K. bond purchase program was a factor helping sentiment. The Bank of England also holds its meeting Thursday morning.
"I think there's an element of optimism around Bernanke, in particular. I'd be surprised if there's much optimism about the president...I think people suspect the speech is dead on arrival," said Knapp. Some Republicans have said they won't attend the speech, and a divided Congress is not seen approving spending increases.
"You might be able to get some agreement on the payroll tax cuts and extending it to employers," said Knapp. Obama reportedly is expected to discuss a series of tax cuts, including the extension of a payroll tax cut enacted in January and tax incentives for companies to hire unemployed workers. Another part of the plan includes new programs to provide federal aid to state and local governments so they can rehabilitate school buildings and keep teachers on staff.
"The markets are levitating right now, and I think it's partly on expectations. We're going to get a short-term positive reaction, but ultimately anything beyond the tax cut extension and the payroll taxes...anything that involves additional spending is going to get shot down," said Dolan.
What Else to Watch
Investors are also watching jobless claims at 8:30 a.m. ET to see if they continue to show signs of improvement. Weekly jobless claims are expected to come in at 405,000, just below last week's level. There is also July international trade data at 8:30 a.m. and consumer credit at 3 p.m. ET.
Knapp said aside from the August employment report, some of last week's data showed signs of stabilizing. If that trend continues, it could take the market back into the bottom of its old range (1250-1350 on the S&P). But to see more movement, the data would have to show signs of real improvement, he said.
The S&P 500 Wednesday rose 33 points, to 1198, and the Dow jumped 275 points to 11,414, snapping a steep three-day decline.
Gold prices fell more than $55 to settle at $1,817. Jim Steel, HSBC commodities analyst, said the gold sell off parallels the Swiss National Bank's commitment to reign in the rising franc. "The Swiss action limits the use of the Swiss franc as a safe haven currency, but in the near term gold has a high correlation to the Swiss franc . The fact the Swiss central bank has drawn a line in the sand, I think, has weakened gold significantly in the short term because of its correlation," he said.
"Does it spell the end of the rally? I'd say no," he said. Steel said he expects emerging market buying from China and India should pick up if the price gets closer to $1700 per ounce.
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