SCOREBOARD: Bernanke tease

US equites dipped then rallied last night as Fed chair Ben Bernanke hinted, eventually, at more monetary stimulus.

US Fed chair Ben Bernanke was predictably bearish in his testimony to the US Senate overnight. He noted there was a recovery underway but that he was keen to highlight the loss of momentum recently – especially in regards to the labour market and household spending. The issue of course is what the Fed intends to do about that, but unfortunately for the markets there was no hint. Risk off! The US dollar surged and US equities dived in the moments following his testimony, and the S&P500 hit a low of 1345 – or down about 1 per cent – all because the crack master didn’t explicitly promise more crack.

The rebound came in the Q&A session when Bernanke was a little more forthright about his intentions. Turns out that the Fed are considering ways to provide more stimulus but aren’t really sure what to do just yet. "We haven't really come to a specific choice at this point …We are looking for ways to address the weakness in the economy should more action be needed."

So they could print, extend the extended period of ultra-low rates or cut the reserves they pay on the squizillions of dollars banks have on deposit at the Fed. I’ve highlighted the circularity before and I don’t see why Bernanke maintains the pretence anymore. I mean if you are of the opinion that the recovery is ‘frustratingly slow’, and Bernanke is, then clearly quantitative easing and its derivatives have proven to be extremely unsuccessful. Indeed, the fact that the unemployment rate has been high, while inflation has accelerated so sharply (notwithstanding recent temporary falls), shows the Fed has consistently failed in its dual mandate. That alone should be enough for any thinking person to change strategy rather that continually repeating a failed one.

In any case his comments brought on the bid and the S&P rallied almost 20 points to close at 1363 or 0.7 per cent higher. The Dow was up 0.6 per cent (12805), while the Nasdaq rose 0.5 per cent (2910). In terms of earnings there were a few heavy hitters last night – Johnson and Johnson, Intel etc and Coca Cola. In general we’re seeing earnings beat expectations marginally, although they may be down from year ago. In some cases that’s just due to one off charges, so in the case of Johnson & Johnson, earnings were down 50 per cent over the year, but excluding one off charges, earnings were 30 per cent above. Naturally, there is general concern over the macroeconomic outlook.

As for our SPI, this rose about 0.3 per cent (4118) – the lack of enthusiasm reflecting a solid performance for our index yesterday and the fact that commodity prices were generally weaker (CRB down 0.1 per cent). Gold was down about $9 to $1582, copper fell 0.4 per cent. Bucking that trend was crude which rose 0.8 per cent to sit at $89. Crude is up $11 or about 14 per cent over the last couple of weeks which isn’t going to make the G20 happy at all.

In the rates space, US treasuries sold off somewhat and yields pushed higher – again though magnitudes were not huge. So the yield on the 10-year is about 4 basis points higher from yesterday (1630 AEST), the 5-year yield is about 3 basis points higher (0.62 per cent) while the 2-year is at 0.23 per cent. Aussie futures were down a tick or two with the 3s at 97.75 and 10s at 97.165.

For forex, Australian dollar pushed a little higher and now sits at 1.0314 or some 20 pips higher than yesterday afternoon. At the low the Australian dollar hit 1.024. The trading pattern for euro was very similar hitting a low around the same time – just after Bernanke – then rebounding to be little changed at 1.2291.

A few bits and pieces otherwise. In terms of the price action, Spanish and Italian yields initially pushed a bit higher but ended the session little changed with Italian 10-years at 6.03 per cent and the Spanish at 6.78 per cent. On the data front we saw UK inflation moderate in June on the back of oil price declines. Unfortunately with it less than clear that oil price declines will be sustained, the recent moderation cannot be regarded as a permanent trajectory. The we saw the German ZEW survey deteriorate a bit, the current situation index fell to 21.1 from 33.2 (still well and truly above the average of -23), sentiment deteriorated though, the index down to -19 from -17 (average 24).

For the US, CPI was little changed in June and the annual rate remained at 17 per cent headline and 2.2 per cent on the core. Industrial production however, was stronger than expected, rising 0.4 per cent in June after a 0.2 per cent fall – manufacturing production was strong rising 0.7 per cent.

The calendar today doesn’t really include much. Tonight we see the BoE’s minutes, and we also get the UK employment numbers. For Europe there isn’t much, only construction output while the Americans release housing starts and the Beige Book. Fed chair Bernanke also continues his testimony to Congress – to the house this time which is usually exactly the same as his Senate testimony.

Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

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@AdamCarrEcon on Twitter.

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