Fed Chairman Ben Bernanke's testimony before the House Budget Committee Wednesday could temporarily shift investor focus from Europe to the U.S. economy.
Bernanke appears at 10 a.m. and is expected to speak on the state of the economy. Bernanke also speaks at 4 p.m. at a forum in Richmond, Va. on employment trends.
TheDow finished Tuesday 1.3 percent higher, and all 10S&P major sectors finished with gains. Bernanke's comments to ABC News that the economy is not likely to see a double dip gave a boost to sentiment. Also, a move up in the euro around the European markets close proved positive for stocks. There were rumors the Swiss central bank was intervening to support the currency.
"Bernanke, I think is going to say the same thing he said last night, which is we're going to get a recovery. It isn't going to be robust, and the Fed isn't' going to wait for unemployment to go back to real levels before it raises rates," said Deutsche Bank chief U.S. economist Joseph LaVorgna.
"He is going to be proverbially cautiously optimistic, with the quotations around cautiously," he said. LaVorgna also said the sovereign debt issues in Europe may be presenting the Fed with a chance to handle its exit strategy differently than it may have otherwise.
"I think Europe is going to give the Fed the opportunity coincidentally to talk more about the exit strategy because they can do it without changing the strategy in the FOMC statement," he said. "Given the events in Europe and the markets are nervous and know the Fed is on hold for a bit longer, that's going to, in a sense, make it easier for the Fed to talk about it."
At every Fed meeting this past year, the markets have been extremely focused on all elements of the Fed's statement, but most especially on the part that says it expects to keep rates low for "an extended period." Economists see the problems in Europe as a reason for the Fed to hold off tightening monetary policy for an even longer time, and now many do not expect any action until next year.
The Fed's beige book on the economy is also released at 2 p.m. Wednesday, and wholesale trade is reported at 10 a.m.
"I don't believe the data are going to be a central focus here. If you get a big employment number some day that will help. I don't see this being a data story. There has to be some other exogenous factor, or the market has to be really oversold," LaVorgna said.
The Dow and S&P 500 both bounced higher Wednesday, though Nasdaq was lower as technology shares underperformed the rest of the market. The Dow was up 123 at 9939 and the S&P was up 11 at 1062. The Nasdaq slipped 3 to 2170. Once more, most of the move came in the final hour.
UBS director of floor operations Art Cashin said technicals were at play in Tuesday's market, and traders were relieved when the S&P held the 1040-1044 area. "They made a double bottom at 1042. There were rumors around that central banks might be intervening to buy the euro. We worked out a range of 1042 to 1057, and now we're try to break out at 1060-1063," he said.
Cashin said it was good to see the market able to move higher. "Encouraged might be too strong, but it was frightening to see a market as oversold as this one not being able to develop a bounce," Cashin said.
In the Treasury market, the issue of $36 billion of 3-year notes went smoothly. The Treasury auctions $21 billion in 10-year notes Wednesday at 1 p.m.
William O'Donnell, head of rate strategy at RBS, expects the 10-year auction to go well too but he expects traders to try to "slam the market back enough to bring in the buyers, bring in the bids and get the deal done."
He said the 10-year, which finished with a yield of 3.171 percent Tuesday, will probably see higher yields before Wednesday is through. "It's hard in this environment when you have tape bombs every 30 minutes to set up for these kind of things," he said, referring to the flow of news from European officials, rating agencies and other sources that have filled news headlines recently.
"We're at or close to the low end of the rate range for the past year, and people are getting Treasury rate vertigo. There's still a flight to quality bid, and now people can see the same head winds the Fed sees, but now they see them in lights, after Greece," he said.
What Else To Watch
There are a number of hearings on Capital Hill focused on the oil spill. At 9:30 a.m., the Senate Natural Resources Committee holds a hearing on increased safety measures; the Senate Committee on Environment and Public Works holds a hearing on the liability cap for big oil, and the House Transportation and Infrastructure Committee holds a hearing on liability limits and whether they should be changed for Deepwater Horizon and future events.
British Petroleum , meanwhile, holds its annual statistical review of world energy.
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