Yesterday the market was confused: first it slid after there was no firm commitment by Bernanke to pursue more easing, then jumped after Bernanke did the usual song and dance, repeating all the possibilities before the Fed, as he always does. As DB summarizes, "The turnaround seemed to come at a time when Bernanke started walking through the “range of possibilities” during the Q&A session. On possible options the Chairman said that there are different types of purchase programmes that could include Treasuries or Treasuries and MBS. Outright purchases aside, the discount window, more communications on the Fed’s future plans and lowering the interest rate on excess reserves were also mentioned." But that the market is confused under the New Central Planning normal, especially with the invisible sell finger dumping out load after load of VIX vol, is nothing new. What is more interesting is what happened this time last year after just the same event took place. DB's Jim Reid reminds us. If past is prologue, watch out.
When we look back at the same event a year ago the overall theme of his speech was more or less the same with one major difference. In that despite one of the weakest recoveries on record inflation was rising rapidly this time last year thanks to one of the strongest post-recession commodities rallies in history. Indeed CPI was running at 3.6% this time last year versus 1.7% currently. In terms of market reaction the S&P 500 also had a bigger reaction to Bernanke’s event last year with an intraday high of +1.36% after the Chairman said that “the possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might re-emerge implying a need for additional policy support.” A week after Bernanke spoke last year we saw the highs for H2 2012 (1345) before moving aggressively lower into the low 1100s through August- October as Europe’s problems intensified and the US debt ceiling problems came to a head. One year on and the biggest H2 risks are probably similar. US data is weakening, Europe’s problems could easily come to a head again and the fiscal cliff could become a major issue, albeit slightly later in the year. We also now have a China slowdown to contend with. So the parallels are there.
One more thing: last year, corporations still were reporting better than expected revenues and profits: note that of the 17 companies reporting yesterday, only 3 missed EPS, but 8 missed the top line. How long until the market realizes the step-wise top and botton line growth is just not coming in Q3 and Q4? Unless, of course, every market plunge is now also "priced in" in perpetuity.