The Fed again green lighted the risk rally.
Stocks on Tuesday closed higher, and the dollar sank after the U.S. Federal Reserve made no changes to its low interest rate policy. Commodities-related materials stocks were the best performers, up 1.5 percent, followed by the financials, up 1.2 percent.
Wednesday's markets will get another dose of Fed Chairman Ben Bernanke when he testifies before the House Financial Services hearing at 2 p.m. on banking supervision. There is also Producer Price Index inflation data, released at 8:30 a.m. PPI is expected to fall 0.3 percent in February, and the core is seen rising by 0.1 percent.
"I don't think there's anything that's going to be surprising in the data," said Miller Tabak chief economic strategist Dan Greenhaus. "Inflation data, especially on the consumer level is fairly benign. A lot of the price pressure we've seen has been energy related."
Bernanke will speak on bank regulation but will also stick to the script set forth on the economy in the Fed statement. The Fed upgraded its view on the economy slightly by saying the labor market is stabilizing, although housing is expected to remain at "flat or depressed levels."
"This time they drove home the point that business spending was robust . They continue to sound genuinely optimistic... but noting the head winds that are in place gives them some flexibility," Greenhaus said. The Fed is also ending its mortgage purchase program, as expected.
The Dow rose 43 to 10,685, and the S&P 500 finished 8 points higher at 1159. The dollar fell 0.8 percent against the euro, to a level of $1.3777. The euro got a boost after Standard and Poor's removed Greece from Creditwatch, though it retained a negative outlook.
Treasury rates fell, with the 10-year yield at 3.66 percent in late trading.
"It looks like the interest rate market has taken the Fed statement as being more accommodating than they might have expected," said Lily Pond Capital chief strategist Robert Sinche. Sinche pointed to a 4.5 basis points decline in the two-year swaps rate.
"It means the dollar is fighting an uphill battle and does not have the interest rate market or interest rate support at its back," he said. Sinche said the next event for the dollar is now the April 2 jobs report, which Fed watchers say will influence the Fed's moves at its next meeting.
So far, financial markets are watching from the sidelines, but the growing rhetoric between China and the U.S. on China's currency policy could start to spill out of the political arena and into market psychology.
"There's a sort of perfect storm brewing that's going to make this a bigger possible shock or risk event for markets," said David Gilmore, strategist with Foreign Exchange Analytics. "The Chinese are very defensive and there's a sort of maturing process happening in Beijing where they are no longer feeling uncomfortable assuming the world stage.
"I think we saw that in Sunday's speech from Premier Wen (Jiabao) when he was pretty firm about not letting his exchange rate appreciate. Then you have Congress trying to show it's doing a great job. What easier way to do that than blame the Chinese yuan for high levels of unemployment and unfair trade practices and rally everyone around an issue that everyone can agree with," said Gilmore. Wen Sunday rejected complaints about China's currency being undervalued, which critics say gives China an unfair trade advantage.
Congress ramped up its criticism of China this week, just as the latest NBC Wall Street Journal poll shows 77 percent of Americans disapprove of the job Congress is doing. A stunning 51 percent said they believe their own Congressional representatives should not be reelected and someone else should be given a chance. The poll also found that 48 percent of Americans believe that health-care reform is a bad idea. The House is expected to vote on the plan later this week.
On Monday, 130 members of Congress sent a letter to Treasury Secretary Tim Geithner asking the Obama Administration to label China a currency manipulator when it issues its regular report on currency manipulation next month. The House Ways and Means committee, meanwhile plans a hearing on China's currency policy next Wednesday.
A bipartisan bill was introduced in the Senate Tuesday by a group of Senators, including New York Democrat Charles Schumer and Republican Lindsey Graham. The bill contains elements of past failed legislative efforts and seeks to require the Treasury Department to identify which countries have currencies that are "misaligned" so the U.S. can place tarriffs on them.
"I think it would be very unfortunate in this environment for U.S. policy makers to undertake this effort at this time," said Sinche. "The world is still a delicate place economically. The amount of benefit that would actually come to the economy and the trade balance, relative to the potential damage this could bring in terms of the global economy, market confidence, cooperation..I just don''t think that's a good tradeoff."
China gets credit for being early to prop up the global economy with a swift injection of stimulus. Markets react nervously whenever it appears the Chinese will hold back or tighten, in order to contain the country's rapid economic growth.
"I just don't think you play politics with issues like this. I just think there are much bigger issues for cooperation. The trade deficit with China has come down substantially over the last year or so. The trade deficit with China is now running at an annual rate of about $38 billion a year less than it was at its peak. It's a meaningful decline," said Sinche.
Gilmore said the situation, if it continues to snowball, could put pressure on interest rates. "Maybe China will be less inclined to accumulate Treasurys, and I think there's already some evidence of that in the TIC data," he said. China was a net seller of Treasurys in December and January, though less so in January, according to Treasury data released Monday.
"It's not going to be helpful if China is viewing Treasurys with a bit of suspicion and disdain," he said. Gilmore said Wen's argument itself is weak in that the Chinese chose to tie their currency to the U.S. dollar, and neither side can afford for the relationship to deteriorate.
"I just don't see what policy makers will get from this. The notion that there could be confrontation, I think impacts equity markets. I think it impacts currency markets. I think it impacts growth expectations. So I'm just trying to figure out in what way anyone thinks this is good for the global economy, and why this would be a beneficial effort for U.S. companies and U.S. growth," Sinche said.
Rather than Geithner, Sinche said the Commerce Secretary Gary Locke would be a better choice to handle China trade diplomacy.
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