Fed Chairman Ben Bernanke is likely to repeat his case Tuesday for a long period of low rates, and he’ll keep markets guessing about whether the Fed will do more quantitative easing.
Bernanke appears before the Senate Committee on the Budget on the economic outlook and federal budget situation at 10 a.m. EST, as he did before the House Budget Committee last week.
“I think he’s pretty happy with yields low, and stocks flying,” said John Briggs, senior Treasury strategist at RBS.
Traders are watching the Fed chairman to see if he alters his comments in any way, to take into account what could be an improving economy. After Friday’s better-than-expected jobs report and other recent data, some Wall Street economists now see first quarter growth at a better pace than the 2 percent many had expected.
“It should, but it won’t” reflect the improved view, said Deutsche Bank chief U.S. economist Joseph LaVorgna, of Bernanke’s testimony. “The thing is the Fed is so worried about things petering out again. The Fed lived through 2011 with all these exogenous factors depressing things… I think it’s too early for them to change but I think they should.”
The Fed, after its meeting last month, forecast it would hold rates at near zero until late 2014. It also left the door open for another round of quantitative easing , as Bernanke did in his testimony last week. Economists believe any further easing would be aimed at housing and include the purchase by the Fed of hundreds of billions of dollars in mortgage securities.
LaVorgna said he expects Bernanke to continue to stress the federal deficit and the potential economic impact of budget reductions. “I think they put way too much emphasis on this fiscal drag,” he said.
“I think if the Fed sounded more upbeat, it might help their case,” said LaVorgna.
Stocks have been riding a momentum wave, and the Dow is up more than 20 percent from its October low. That was just several weeks after the Fed announced ‘Operation Twist,’ a program where the Fed buys longer dated securities and sells the same amount of shorter dated securities. Quantitative easing is when the Fed purchases assets, but without the sales.
Both types of programs aim to drive rates lower and push investors into riskier assets, like stocks.
Stocks took a breather Monday, with the Dow slipping 17 to 12,845, and the S&P 500 off less than a point at 1,344.
Harris Private Bank CIO Jack Ablin said he’s considering whether it’s getting near a point for profit-taking, since he is just a few percent away from his targeted 12 percent gain for the year in the S&P.
“We like the favorable momentum, and it’s a cheap market. Now, the question is if we hit our annual, year-end target before year end, do we declare victory and sell? That’s what we should have done last year. We got our 9.5 percent target in April, and we let it slip away,” he said. The S&P 500 closed dead flat for the year, with the index off by a few tenths of a point.
“The market has been trading below its long-term average now for two years or more.. I’m not real impressed with the momentum of the earnings… Part of this is it’s a leap of faith. We have to get credit for the profits we got last year that we didn’t get any credit for,” he said.
“I’m not looking for fire works here. I’m just looking for reasonable return,” he said.
What to Watch
There are some major earnings Tuesday, including Coca-Cola, BP, Glaxo Smithkline, UBS and Arcelor Mittal before the opening bell. Disney, Hartford Financial and Panera Bread report after the close. JOLTS, job openings and layoff data, is reported at 10 a.m. and consumer credit is released at 3 p.m.
There is also a $32 billion 3-year auction.
Europe will also stay a focus as Greece’s prime minister holds talks with the European Union and IMF officials. In Greece, two major unions say they will hold a 24-hour national strike over new austerity measures.
But Bernanke will get the most attention, at least until 11 a.m.
That’s when New York City holds a ticker tape parade for the Super Bowl champion New York Giants. Briggs said his strategy will be “Watch the parade, but keep the headlines up” for Bernanke.
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