Sentment: Hoping And Praying Bernanke Sees His Shadow And Six More Months Of NEW QE

Tyler Durden's picture

Everything today is all about the Fed, which at 12:30 pm will release its standard statement. The publication of Fed officials' forecasts and Chairman Bernanke's press conference will follow at 14:00 and 14:15, respectively. Some, like Goldman are convinced the Fed will announce new easing measures, which could take the form of a new LSAP, more Twist as well as a lengthening of short-term rate guidance beyond 2014, potentially going as far as announcing a Flow-based form of QE, while others such as BofA are fairly certain nothing will happen. Then at 2:00 pm the Fed will release its new economic projections, in which it is roundly expected that the Fed will revise its GDP forecasts for 2012 and 2013 lower, and unemployment - higher. Finally at 2:15 pm Bernanke will address Steve Liesman and a few other members of the fawning captured media. By then the market will be either much higher or much lower, although with about 5% of the recent market move driven entirely by pricing in of more QE, the risk is to the downside. In other words the hopium phase is over. It is now make or break for the Fed.

Full recap of the last hopium rally in a rally from BofA:

This afternoon the Fed is due to announce any changes to their monetary policy stance. Below we provide a full preview. Overnight Asian equity markets rallied as markets participants increased their expectations that the Fed would either extend Operation Twist or announce a new QE program. We expect neither from the Fed at today's meeting. That would let markets down leading to a sell off after the meeting in the equity markets. Also helping sentiment was the statement from G20 leaders saying that they pledged to support economic growth and help overcome Europe's debt crisis. We think pledges from global leaders will not solve the problems in Europe. Europe needs real internal leadership to drive the hard choices - further integration on the political, fiscal and banking fronts -nothing, in our view, has changed the situation in Europe after the G20 meeting. 

That said, Asian equity markets rallied sharply with the MSCI Asia Pacific Index up 1%. The index has now reached its highest level since May 15. Looking at the individual markets, the best performer was the Japanese Nikkei up 1.1%. The Korean Kospi was a distant second up 0.7% and the Hang Seng rounded out the top three up 0.5%. The Indian Sensex managed to finish 0.2% higher while on the flip side the Shanghai Composite fell 0.3%. 

In Europe, equities are trading 0.1% higher in the aggregate. Shares listed in London are outperforming the other major indices up 0.4%. At home, futures are pointing to a flat open later today. That follows yesterday 1.0% rally. The market should remain relatively unchanged up until today's FOMC announcement in the early afternoon. 

In bondland, Treasuries are backing up modestly. The 10-year yield is 1bp higher at 1.63%. In Europe, yields on Spain's 10-year have fallen below 7%. The note's yield dropped 13bp to 6.83%. Italy's 10-year borrowing costs are now below 6% at 5.80%. 

The dollar is trading flat against a basket of other major currencies. Commodities are slightly lower with WTI crude trading at $84.02 a barrel and gold at $1,612.23. 

FOMC: Holding on loosely

Our long-held view has been that the Fed will launch QE3 by early fall, and that remains our view today. We also think it will not start hiking interest rates until mid-2015 at the earliest. Exactly when the Fed will announce such easing actions depends on the outlook and risks. We see about a 1-in-3 chance that it will launch a significant action in June, although by September we see a 75% chance of QE3. At this meeting, we expect Fed officials to sound very dovish, lower their forecasts, and signal that they are on "high alert." Nonetheless, markets may still be disappointed.

Some market participants argue that QE does not matter because rates are so low. However, Fed policy via QE could replace a fear-driven flight-to-safety cause for low rates. This action also could put a floor under sentiment to prevent a self-fulfilling negative spiral. More QE could price out deflationary or "Japanification" worries as well. Another concern is that QE3 may have a diminishing marginal benefit. Chairman Ben Bernanke has acknowledged this possibility, and a recent SF Fed study found a smaller effect from QE2/OT relative to QE1, although not zero. This larger impact appears due to its size and because markets were more stressed. This argues for a sizable Fed action, especially if strains from Europe wash onto US shores, hence our call for US$800bn in purchases later this year.

Dovish downgrades

As for the meeting today, we expect the FOMC statement, released at 12:30pm to be dovish, but not to announce new easing measures. Current conditions are likely to be marked down, noting the slowdowns in hiring and consumer spending, as well as the drop in energy prices. The outlook should be more cautious, citing "significant downside risks" from Europe and the US fiscal cliff. A stronger policy commitment is also possible: instead of "is prepared" to adjust its balance sheet to support the recovery, it could say it "stands ready" and drop "as appropriate" - implying more urgency to act. We also look for downward revisions to their rate forecasts, especially by the dovish FOMC members.

Market implications

We see a disappointment from the Fed as being negative for risky assets and ironically positive for Treasuries. Implications could be muted by how dovish the statement, projections and press conference are perceived by the market, since the market may simply push out the timing of QE3. However, any extension of Operation Twist looks to us a lot less likely once it ends.

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Croatian Patriot's picture

No QE3 today. Gold 1580$, silver who knows

Confundido's picture

$1,580/oz is too expensive....

HelluvaEngineer's picture

It's backed by nothing, you know?

francis_sawyer's picture

Appropriate meatphor about "seeing his shadow" because this market has become, in fact, 'Groundhog Day'...

Divided States of America's picture

Groundhog day again??? Bernanke should be renamed Printsatonamoney Ben (Sorry Punxsutawney Phil for the comparison)

and he definitely got scared of his own shadow

Soul Train's picture

hey Tyler, you are so right.

also, have you noticed the Fed is playing good cop bad cop. The 'Chairman' Benny is the bad cop, the vice chairman bitch is the good cop.

So primitive.

What a complete scam. Just like Obama and the other fed politicians.

Change you can believe in, ha ha.

falak pema's picture

you're right I wouldn't pay that for Bernanke's brain, or for Mubarak's for that matter. Maybe for Madonna's, she has a high IQ, twice that of the other two. But I can wait as she may still need it to fight the general flight from reason in her region, and that is no treason its commons sense. 

Lets operation twist again...sings the Berwanky. Lets operate the brain say I. Looking desperately for a sweet Susan to replace loony Bernanke! 

midgetrannyporn's picture

What a sad joke this has all become.

orangedrinkandchips's picture

well put.


Sad on so many levels.

Confundido's picture

Anyone surprise that gold is selling this morning? I am amazed at how the media and analysts focus on activity data to justify whether or not easing is warranted. What about the fiscal deficits of the US? If the Fed whimsically stopped buying, who the f... is going to take over? Of course they are going to have to buy. Eventually, may be not today... but they shall....

Aziz's picture

Fucking junkies.

Catullus's picture

Not announcing another LSAP is now dovish.

Vincent Vega's picture

There is simply not enough money in the world. If they would just print some more everything would be fine. <sarc>

Debugas's picture

Benny can not print for nothing - he needs obligations to pay-back in exchange

VonManstein's picture

one question here.

Benny can, as we know afford to let the stock market down, he has a lot of room to play with. But can Benny boy afford to let the BOND market down? Everyones been buying TSY like crazy past few months, with intention to sell to Ben at a later date. If ben says he isnt coming then surely bonds will fall. They cant stay here no their own surely??

today will be interesting

(note to self, always remember the market is retarded and bipolar)

bdc63's picture

(note to self, always remember that the market is manipulated and the FED is the biggest dealer in insider information)

rzero's picture

No action. Maybe some wordsmithing nonsense, but nothing else.

Wynn's picture

Its like 1931 all over again Ben, whatcha gonna do? You're the expert remember.


Boilermaker's picture

Ah yes, equity valuations, the savior of the entire fucking human race.

HelluvaEngineer's picture

If they go up enough, you can retire early and sell your shares to, ummm...your kids?

Boilermaker's picture

The modern version of heirloom, I guess.  Here's your grandfather's pocket watch and 500 common shares of Facebook.

bigwavedave's picture

Great headline TD

miker's picture

No QE from the Fed; probably Op Twist extension. 

The stock market will NOT sell off; probably look like it's yawing even though there will be moderate selling.  The Fed will ensure enough buying to counterbalance. 

PM's will get hammered.

The only way the stock market will sell off hard is with a big exogenous event that the Fed can't counter with its indirect buying.

rsnoble's picture

Boy what a fucked up system. If the markets are totally dependent on free money what kind of market is that? This whole POS system is a farce.

Dual mandate? Save bankers and destroy everyone else?

For many in the US, along with the rest of the world, life is harder because you are now in quicksand up to your waist. A few more QE's and up to your neck.

Just wait and see what happens when Iran flares up. Of course all out nuclear war is probably their solution to boost the economy.

This planet is finished.

ChrisDG74's picture

Wall Street has "Benny and the (Ink)Jets" playing on a loop this morning.

q99x2's picture

I bet a nickel that the market goes down a little today. Maybe 27.5 points on the Dow and 3.2 points on the S&P. And, that the words uttered from the Bernank will be hard to interpret due to stomach flu.

ebworthen's picture

Word of a Greek Coalition Government being successful = Robo jolly rally romp.

Plus Ben saying something about easing and ZIRP into 2025 with his quavering voice.

We will probably have to wait another six months or a year for perception to catch up to reality, and vice-versa.

Monkeyfister's picture

So, they're rolling out QE3 because the first two waves of QE were such huge success stories?

As long as there is no moral hazard involved...



orangedrinkandchips's picture

It is NOT THE FED that is standing in the way...IT IS POLICY FROM THE GOVT. and the Fed has to play on an uneven field.

Both parties suck balls



Quinvarius's picture

The Fed will announce some program that allows banks to profit by front running their trades.  What concoction they come up with is unknown.  But it will only serve the one purpose of allowing banks to front run trades because they obviously can't make money trying to trade on their own.

CcalSD's picture

The Ben Bernake- Biggest rodent in the US of A

punxsutawney phil's picture

I am not a rodent, I am a highly evolved animal prognisticator. 

ATG's picture

"the risk is to the downside. In other words the hopium phase is over"

Prescient comments TD.

Physical silver, the only form worth holding, watching and trading, waterfalling down today with Crude leading the way South for the Summer.

There may be no Twisted Knickers, QEIII or other loosening, GS notwithstanding.

Bellwether AAPL sputtering.

QQQ puts during this quiet period may make dollars and sense.

Some other ideas:

Mr_Wonderful's picture

Inside the World of Ben Bernanke A glimpse into the rarified rooms in Washington where the Fed Chairman oversees the U.S. financial system