Bernanke Sets Cat Among the Pigeons

Marc To Market's picture

The Federal Reserve delivered a one-two punch to market expectations today. First the FOMC minutes did not appear as hawkish as many expected. Several FOMC members wanted to see more job growth before pulling back on the throttle. Second, Bernanke's comments in response to questions raise doubts over the consensus view among primary dealers, and the market more generally, about when the tapering will take place. 

The consensus that emerged in recent weeks was for the Fed to announce a slowing of purchases of long-term assets at the September FOMC meeting that would begin in October. The market had also moved to discount a good chance of the first hike in the Fed funds rate in late 2014 or early 2015.

Bernanke's comments gave the market reason to re-evaluate. That re-evaluation is positive for bonds and stocks and negative for the US dollar. Bernanke's comments took place after the NY markets had closed, but before the Asian session began. These thin market conditions contributed to the volatility and the magnitude of price adjustments.

Our view has been that the market was ahead of itself and we thought the tapering would come later. We have suggested, drawing insight from game theory, that the Federal Reserve would benefit by allowing the next head of the Federal Reserve to taper and thereby establish anti-inflation credentials that may be important in the coming years. That credential would be wasted on Bernanke, who will go down in history for using unconventional policies to ensure monetary policy was sufficiently accommodative to prevent the Great Recession from turning into (another) Great Depression. 

Bernanke said several things that prompted the dramatic reaction, which took place not on a blank slate, of course, but in the context of market positioning that was inclined to see higher US interest rates and a stronger US dollar.  In fact, earlier this week, the Dollar Index rose to three year highs.  The euro had fallen to three month lows and sterling to three year lows.  

Bernanke indicated that monetary policy would remain highly accommodative for the foreseeable future.  He indicated that jobs market may not be as strong as it looks, due to the decline in the participation rate and other measures of labor market that continue to show unsatisfactory improvement.  

In a tip of hat to Bullard, the Fed President that dissented from the statement of the last meeting because it did not pay sufficient attention to the decline in measured price pressures, Bernanke said the Fed would defend its target from both sides (above and below). 

He did reiterate that the Fed expected that some of the forces dampening price pressures would prove transitory in nature.  Bernanke also suggested it was too early to conclude that the economy has weathered the fiscal tightening.   Lastly, Bernanke warned that the Fed would push back if the market tightened conditions prematurely.  

The euro, which had traded as low as $1.2755-65, Tuesday-Wednesday shot up a little through $1.3200 before the Asian session began in earnest.  This is more than the 61.8% retracement of the decline since last month's FOMC meeting.  Stops were obviously triggered and this served to exacerbate the move.  By the time Tokyo opened the euro was back near $1.3100.  

Sterling had slumped to about $1.4815 on Tuesday and set a low near $1.4845 on Wednesday shot up to almost $1.5200, a little more than the 50% of its decline since mid-June.  It was just above $1.5100 at the start of the Tokyo session.  

The dollar recovered from the mid-June slump that had brought it below JPY95 to trade as high as JPY101.20 on Tuesday and Wednesday.  It fell to about JPY98.30 in the back of Bernanke's comments and recovered toward JPY99.50 by the start of the Tokyo session. 

The dollar slumped more broadly as well, losing ground to the dollar-bloc and emerging market currencies.  US shares rallied in electronic activity and the first Asia-Pacific equity markets to open, started higher, though Tokyo was an exception as the rise in the yen weighed on sentiment.  

Separately, the MOF reported Japanese investors bought foreign bonds last week for the first time in nearly two months.  Foreign investors continued to buy Japanese stocks.  

We are as surprised as any one by the dramatic market response, even if exaggerated in thinner market conditions.  Our big picture view though is unchanged.   We continue to expect the Fed to be the first of the major central banks that will exit the extraordinary easing and that this will underpin the dollar.  We continue to look for the euro to finish the year near $1.20 and sterling near $1.45.  We suspect that euro area problems will intensify again, perhaps after the German election at the end of the quarter.  

We are concerned that Abenomics is largely old LDP wine (of fiscal policy and easy monetary policy), even if on steroids, in new skin.  The structural reforms will exacerbate the surplus savings of Japan's corporate sector without boosting wages or consumption.  We suspect that the international community's tolerance of a weak yen may soften as the Japanese economy remains the fastest growing among the major economies.  We project the dollar to finish the year near JPY101.  

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Vegetius's picture

"Bernanke, who will go down in history for using unconventional policies to ensure monetary policy was sufficiently accommodative to prevent the Great Recession from turning into (another) Great Depression."

Err?  I don't think so. Granted Bernanke has up to now prevented a Great Depression ( Which the Central Banks created) Serial bubble blowing has been one of the main problems that caused this crash. Bernanke has blown the biggest bubble in History and it will blow up, when is the big question.

It is most likely that Bernanke can see it coming and is belatedly trying to put the brakes on. He will bail out shortly and can then blame Obama for it all (based on the idea that if he had been allowed to stay he would have fixed it)

To be honest who cares, this bomb will blow up and it will all burn. As for Bernanke he is a dead man walking he will be blamed and hung out to dry.

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.

- Jefferson

KingTut's picture

Today Bernanke said that unemployment was probably worse than the numbers indicated.

This is obvious to anyone who reads ZH and/or Shadowstats, but Bernanke is the LAST human on earth who is supposed to admit this.  So what the F* is going on here? 

A few weeks ago Bernanke endured a public execution from Obama, and propmtly told the world "we're going to stop printing".  The market lost 500 points in 2 days.  Was that an FU to Obama as in "watch this you pustule".  Now he's hinting that the whole edifice of Fed statements, projections and mandates is less than honest.  This is WAY outside of his job description.

Since there is no way in hell Obama will renominate Bernanke, is Ben retaliating?  Or something more sinister afoot?  Ben can make Obama's life a living hell just with vague suggestions, hints and inuendos that leave him essentially blameless, but send Obama's adminstration into chaos.

The chairman is acting very strangely, the question is why?  Santelli asked a few weeks ago "What is Bernanke afraid of?".  The answer is obvious: $1 quadrillion in derrivatives is what keeps Ben up at night. Has the Fed lost control of them?  Has the first domino fallen?  Is the lame duck chairman trying to warn us?

Notarocketscientist's picture

'see more job growth'

So 130,000 full time jobs since January is not enough?   How many jobs does Bernanke need before he tapers - will it take say 23,000 full time jobs per month?  25,000?  How about 30,000?

Come on Ben stop fucking with us.....  taper already ----  recovery is at hand!

Lets Buy The Dip's picture

I had to +1 you, but its all planned my boy. 

a sneaky turn of events in the FED meetting. THE BEARS are hating the market right now…trying to call a top and we keep going higher! They are spitting chips SEE HERE ==>

Everyman's picture

"That credential would be wasted on Bernanke, who will go down in history for using unconventional policies to ensure monetary policy was sufficiently accommodative to prevent the Great Recession from turning into (another) Great Depression."

He will go down in history as one of the biggest financial and economic asses in TOTAL RECORDED history.  He is the biggest piece of human feces that has EVER walked. 

This man will be lucky in the next five years if hes is not follwed down, and drawn and quartered.  He is such an ugly piece of filth.  And his only trick, (showing a decidedly LACK of creativity and LACK of understanding of fundamentals) is to print more money to the tune of TRILLIONS and "giving it to banks" for the reserves and then lending back on it, and then buying it back.  BIGGEST PONZI ever.  AND it shows that the academia  "smart people" are dumber than dogshit!


Fuck this asshole.

Element's picture

Always appreciate your remarks and analysis Marc, a bit like 'eating your greens' - its good for you.

Can we have some dessert too?

(was wondering if Bernanke accidentally googled John Williams' Shadow Government Statistics site and over-twitched his klepto-nerve ... again ... that happens sometimes)

Obchelli's picture

And S&P futures up 15  comfortably never ever down that much... Just makes me sick...

wisehiney's picture

Those bloody feathers look more like those of a sitting duck than a pigeon.