Bernanke Back in the Hot Seat as QE Expectations Cool
As markets enter the month of March, central bankers are sounding a bit more like “lions,” than the usual “lambs.”
Fed Chairman Ben Bernanke dealt markets a surprise Wednesday when his comments during the first of two days of Congressional testimony suggested that another round of easing may not necessarily be in store. He helped send stocks lower, the dollar higher and precious metals to their worst day in more than two months.
Traders said it was more about what Bernanke didn’t say than what he did say. “It was different because I think what we saw was Bernanke questioning the appropriateness of more aggressive easing through QE3,” said Zane Brown, fixed income strategist at Lord Abbett. “The fact it was noticeably absent in his testimony, I think indicates a change in thinking.”
Brown said it will be important to see if Bernanke raises quantitative easing in Thursday’s 10 a.m. testimony before the Senate Banking committee, and how he might answer questions related to it. The Fed had been expected by many market participants to embark on a third round of quantitative easing.
Fed officials have signaled the Fed could purchase mortgage securities in a further easing round, instead of Treasurys, if the economy needed help. Many analysts believe just the idea of more QE has been a factor behind the rising stock market and commodities prices.
Even as Bernanke is sounding a bit less aggressive on easing, that lion is still really seen as a pussy cat, as the Fed chairman is expected to once more reassure markets that rates are going to stay low for a long time. Bernanke’s comments also came as Bank of England policy maker Martin Weale said he doesn’t see a case for more stimulus after the BOE’s current round of bond purchases is complete, adding that rising energy costs threaten to bring inflation.
Bernanke too raised the possibility of a temporary pickup in inflation from rising gasoline prices, so traders were quick to tie the two commentaries together. The Fed has made it clear that if inflation were to become a factor, the likelihood of QE diminishes.
Brown said two factors that would push the Fed to ease were high unemployment and tight lending. Unemployment is slowly edging down and was last reported at 8.3 percent, below the Fed’s stated expectation. “We’ve had three quarters in a row where lending has improved. Commercial and industry, mortgage loans and credit card lending has been expanding,” he said. He also said the markets now expect to see weekly jobless claims continue to come in around 350,000, a sign that the jobs market is healing.
Brown also said comments from St. Louis Fed President James Bullard this week indicate he may think that lower mortgage rates won’t help housing further, a sign that perhaps the Fed is backing away from the idea of mortgage purchases.
Bernanke did say that the job market is far from normal, and he warned that fiscal tightening could impact the economy, a big worry for the Fed. As expected, he stayed cautious on the economy and said the recovery was uneven and modest.
Bernanke’s comments come against a backdrop of mixed data. Durable goods was weaker than expected Tuesday, but the revisions to fourth quarter GDP, reported Wednesday, took it to 3 percent, above the 2.7 percent expected. It also showed that personal income rose 1.4 percent, twice the original amount reported for the fourth quarter.
“We may be on a rethink here,” said Brown.
After Bernanke’s testimony, Philadelphia Fed President Charles Plosser, a hawk, said on “Closing Bell” that the Fed’s case for easing goes away with improvement in the economy and he is encouraged by what he is seeing. He also said he believes the Fed should raise rates before its targeted yearend 2014, and in fact his own target is 2012 for the first rate hike.
There are several Fed speakers Thursday, including Cleveland Fed President Sandra Pianalto, who speaks at 8 a.m.; Atlanta Fed President Dennis Lockhart, who speaks on the economy and banking at 12:30 p.m., and San Francisco Fed President John Williams, who speaks at 11:30 p.m. at an economic forecast dinner in Hawaii.
Weekly jobless claims are reported at 8:30 a.m. EST Thursday, as is personal income. ISM manufacturing data and construction spending are reported at 10 a.m. Monthly sales data from chain stores and auto makers are also reported throughout the day. According to Thomson Reuters, chain stores are expected to show a 4.8 percent gain in February. Car sales are also expected to remain strong and could match January’s 14 million average selling rate.
The Dow closed out February with a loss of 53 points, to 12,952, but it was up 2.5 percent for the month and is now up 6 percent year to date. The Nasdaq, riding a tech rally and biotech rally since the start of the year is up 13.2 percent and was up 5.4 percent for February. It lost 19 points to 2,966, after crossing above 3,000 Wednesday for the first time since December, 2000.
The S&P fell 6 points to 1,365 Thursday, and was up 4 percent for the month of February, and 8.6 percent year-to-date. Its February gain is the best since 1998.
“Since 1945, we have had 25 years in which the market was higher in both January and February,” said Sam Stovall, chief equity strategist with S&P Capital IQ.
“It signals a good year ahead because in 24 of those 25 years, the market was up for the full year and the one time it was not up, it was flat,” he said. February is traditionally a weak time for stocks, and analysts have been expecting a correction. For March, the S&P has averaged a 1.4 percent gain, Stovall said.
“Actually, the market is a little bit on the lion side. March is the fourth best month,” said Stovall.
Gold was the dramatic mover Thursday, losing $77.31 per troy ounce, or 4.3 percent to $1709.90. The dollar gained 1 percent against the euro in its biggest move since Jan. 13. The euro slid to 1.3324.
The 10-year yield rose to 1.981 percent Wednesday, but just after Bernanke’s speech was released, it shot above 2 percent briefly, spurring rumors of a “fat finger” trade. But some market participants immediately dismissed it as an error.
“The market was trading well. You had LTRO (the European lending operation). One big trade set that off, and we’ve not seen any selling since,” said David Ader, head of Treasury strategy at CRT Capital, just before midday Wednesday.
“It looks like a one off,” he said, dismissing the rumor. The Chicago Mercantile Exchange later said there was no evidence of a mistake trade in Treasury futures.
What Else to Watch
Besides Bernanke, the focus will also be on Europe where EU finance ministers and leaders meet at a summit. Talks are set to focus on the euro zone agreement on tighter fiscal integration. Traders are also watching for news from the International Swaps and Derivatives Association which has a special committee reviewing developments in Greece’s restructuring for a potential “credit event,” that could trigger credit default swaps.
Earnings are expected ahead of the opening bell from Big Lots, Kroger, Royal Ahold, Royal Bank of Canada, Toronto Dominion, Martha Stewart Omnimedia and Wendy’s. Foot Locker reports after the bell.
Yelp, the latest internet company to go public, is expected to price its IPO after the close.