Weekly jobless claims and the Philadelphia Fed survey are the reports to watch Thursday, but the intrigue in currency markets will likely be what keeps traders chattering.
Japan's surprise intervention overnight Wednesday drove the yen sharply lower and sparked talk of further moves by the Bank of Japan in coming days.
Stocks Wednesday were slightly higherafter a day of quiet trading. The Dow was up 46 at 10,572 and the S&P 500 rose 3 to 1125. The bond market saw selling at the long end, and the yield on the 10-year rose to 2.724. The short end benefited from speculation Japan would be a more active buyer as it looks for a place to put its dollars. The two-year note saw buying, which pushed its yield lower to 0.487 percent.
Gold, after hitting a record Tuesday, pulled back slightly to $1,268, down $3 per troy ounce. Financier George Soros called the metal the "ultimate bubble" Wednesday.
The dollar strengthened as the yen fell 3 percent in New York trading. Talk the Fed may embark on a new quantitative easing program had pushed the green back lower Tuesday.
"Currency politics here suddenly knocked the whole Fed QE 2 story to smithereens," said David Gilmore, strategist with Foreign Exchange Analytics. But by Monday, he says "all bets are off. It will be all about the Fed."
Weekly jobless claims are released at 8:30 a.m. and are expected to show a slight increase from last week. PPI is also released at 8:30 a.m. and the Philadelphia Fed survey is reported at 10 a.m.
Traders will also be watching an early morning earnings report from FedEX for what the company says about its outlook and the economy. Later in the day, two important tech names report earnings -- Oracle and Research in Motion.
The timing couldn't be better for Treasury Secretary Tim Geithner to appear before a Senate Banking Committee hearing on China's currency policy Thursday morning. He testifies again before a House Ways and Means subcommittee in the afternoon. In prepared remarks Wednesday evening, he said the pace of appreciation of the Chinese yuan is too slow and it's imperative to have a more balanced economic relationship.
Geithner so far has not commented on the Japanese intervention, but critical remarks came from Jean-Claude Juncker, who chairs the euro zone finance ministers. He said the unilateral action was an inappropriate way to deal with global imbalances. The Bank of Japan embarked on its first intervention in six years after verbal intervention failed to curb the rising yen, a negative for its exporters. The intervention was reported to be as much as $20 billion, or more.
Gilmore said China's policy of using its currency to protect its export business is, in a way, the same type of action taken Japan has taken to stem the yen's rise. "Congress is going to beat on China's currency policy and China just got a free ride from Japan," he said.
Gilmore said Geithner could stir things up if he wants by being critical of Japan, if asked about the intervention during Thursday's hearing.
"He could say it's best for markets to set exchange rates. That's code for 'we don't like what you're doing,'" he said. Gilmore also said Japan is probably unlikely to succeed in holding back the yen for long with its intervention, but that it may have more of a chance because it has signaled it does not expect to "sterilize" the intervention. That is when a central bank would for instance sell t-bills to take the surplus money out of the system.
"That means a permanent increase in the money supply, which means printing yen, and we can call it quantitative easing," he said.
As a result of all this intrigue, the Treasury international capital data may be even more interesting than usual when it is released at 9 a.m. Gilmore said that it is likely China's net holdings of Treasurys will again decline, and Japan's will again increase.
David Ader, chief Treasury strategist at CRT Capital, said the TIC data will be interesting but probably not market moving. He said the bond market is likely to stay locked in its range for now until it finds a new catalyst. "The data right now is not enough of a trigger to go one way or the other so it's going to take a respite right now," he said.
Stocks Rising into Year End?
Stock traders pointed out that Wednesday's mixed data could have sent the market either way, but the lack of sellers held stocks fairly steady for a second day. One trader said some of the institutions that were active buyers last week were sitting out. "The brakes are on and they want to watch the market trade at this level without them," he said.
"We're really up against the technical level of 1130 on the S and P 500," said Andrew Burkly, strategist with Brown Brothers Harriman. "Everybody is looking at that right now. That's just the level we stalled at for the last couple of months. Everybody has their eyes on it. If this is really going to be a powerful break out move, the market's going to break through that."
Burkly said he thinks the market is getting ready to rise into the year end. "I think there's a pretty good asset allocation switch setting up here. If you look at the earnings yield on stocks at 7.5 percent on the S&P 500, that's well above corporate bonds at this point.," he said. "..We use bond market sentiment as a good contrarian indicator for stocks as well as our overall macro case."
Burkly said the sentiment towards equities changed when some of the economic reports started coming in better than expected.
Many strategists had expected the stock market to be choppy in September, but Burkly said it is following a pattern seen in midterm election years, where it usually bottoms by some point in September. "The market usually rallies in anticipation (of the election) in that case. It's actually playing to that script pretty closely," he said. He does expect slower economic growth, but the market has overreacted to it.
"Maybe we pull back a little bit here, but I think within the next few weeks, we'll be able to get through 1130 on the upside. We have that 1250 year end target," he said.
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