Previewing Bernanke's Speech And Final Thoughts From Citi's Steven Englander And Other Analysts
Below, for those who are still undecided we present RanSquawk's preview of what to expect, or as the case may be, not expect, from the Chairman in about 3 hours, when the embargo on his speech is lifted. Also attached is the final summary of Citi's Steven Englander of what the Chairman's thoughts would mean for the dollar, as well as various third party takes on implications for gold and other general asset prices. The consensus, as noted yesterday, is one of no immediate escalation in the push for QE3 as the stock plunge has been contained for the time being - a factor that has always been the primary catalyst for Fed decisionmaking. Granted should the S&P drop to around 1,000, everything will change. In terms of catalysts, the next FOMC meeting will be September 20, so at best silence from the Fed today will mean the market is on its own for 4 weeks, with an ugly NFP number inbetween. In other words, the next month is shaping up for yet more abnormal volatility, "as usual" for 2011.
From Ran Squawk:
Having navigated through another volatile week market participants will now turn their attention to Fed’s Bernanke and his interpretation of recent market events and which direction the Federal Reserve will take in order to maintain the recovery of the US economy.
One of the biggest questions heading into this week was whether the Fed will embark on additional Quantitative Easing (QE3) but as the week has progressed expectations of further QE seem to have dissipated. It now seems the most likely scenario may well be one that sounds distinctly similar to the last FOMC meeting where by the Fed committed itself to keeping rates low until mid-2013. Nonetheless markets continue to lack confidence and unless Bernanke satisfies, whether that is by monetary change or a verbal commitment, there is a chance he may disappoint the market and as such run the risk of further downside pressure in US stock futures.
Looking at the situation more closely there are several reasons as to why further QE at this stage may be premature. Firstly, the Fed has only recently softened its stance to support the recovery in its last meeting and would risk jeopardising its credibility to change its direction so soon after. Also the highly accommodative stance of the Fed has already prompted several board members to be vocal in their opposition to the pledge showing that the regional governors are already divided in opinion. Secondly, foreign buyers who were already bulking at QE2 will likely continue their distain toward the US and its currency, a slippery slope considering China is the biggest holder of the US debt and with S&P already having cut the US’s AAA sovereign rating. Other key factors to consider include the recent rise in various US inflation indicators which Fed members will be mindful of if more money were to be pumped into the system. Then finally political timing is not favourable given President Obama’s approval rating is at all-time lows. With this in mind Bernanke may well look to adopt alternative tools in order to appease the markets and show that they are willing to act but at the same time saving some ammunition if the economy were to deteriorate further.
In terms of the language, it would be of no surprise to hear the Fed chairman reiterate that the Federal Reserve will do what is necessary to stimulate the economy and has the tools to do so. However, given the expectation heading into today he may well have to go one step further and unveil new measures. One step which has been spoken off by several institutions is the re-invention of ‘operation-twist’ a practise where by the Fed would sell shorter-dated securities held in its portfolio and target the longer end of the curve. Other less plausible but still realistic measures may be that the central bank opts to lower the interest rate paid on excess reserves. If in the unlikely event the Fed does go further and more QE is adopted it would be a big shock and would certainly result in the biggest reaction with T-notes and gold prices likely to soar at the determent of the USD.
Our economists don’t expect any QE commitment, let alone any ‘shock and awe’ radical policy measures. Investors also appear to have backed away from expectations that the Fed Chairman would present any sort of August surprise. However, he is expected willingness to take further policy measures, and probably would not exclude QE, if there was a further severe deterioration of the US economy.
We also have to acknowledge that there is a view in the market that the Fed Chairman sees an obligation to respond aggressively to weakness, and will look for a nod to measures beyond even QE or terming out rates (again not the view of our colleagues), so there could be a segment of the market disappointed if he delivers a conventional speech as described above. Such Krugman-like out of the box policy measures appear very premature right now, but it is interesting that the debate has started at least at the fringes.
Assuming that he presents as planned, the major effort of FX investors will be to gauge the body language of his comments. The key question would be how much of a significant further weakening it would take for him to take more aggressive action. The market reaction would probably be determined by whether the response is being seen around the corner, or quite a bit down the road. In that context, were he to express any kind of confidence in the US economic bounceback – i.e. that the economy is not as weak as current indicators, forecasts and asset price moves suggest -- that would probably be interpreted as more wait and see than getting primed to move. Given where asset prices are, an expectation of mediocre economic performance, rather than dismal, would represent an optimistic view of the economy, but might lead FX investors to sell USD if they think asset market relief will not be forthcoming soon.
And summarizing some selected third party thoughts (via Bloomberg):
- Impact from another round of QE “more limited,” Saxo’s Steen Jakobsen says; 2-8 weeks of relief risk-on trading at best.
- Start of QE1 created 78% rally, QE2 29%; most likely impact of QE3 7%-15 to 1250-1350 on the S&P 500,;may also signal final leg of weak USD
- Gold may rise as high as $3,000/oz, if not $4,000/oz, other metals “should follow suit”
- Bernanke to emphasize constraints to U.S. growth, policy, offer some clarification on policy options, “no strong hints on when or what": Monument’s Marc Ostwald
- Bernanke has been stressing inflation is key distinguishing factor between current situation and start of Q4 2010
- Not a policy setting speech, Bernanke may re-iterate some options available to the Fed, will repeat ready to do whatever is necessary: ING’s Rob Carnell
In other words, nobody knows what will happen.
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