Bernanke today testifies on monetary policy before the House Financial Services Committee (formerly the Humphrey-Hawkins). The testimony will be released at 8:30 am NY with Q&A after his testimony. Tomorrow he testifies before the Senate Banking Committee but the prepared remarks are the same for both days. Indeed it’s likely that the Q&A will be where all the fun starts. As DB says, he will likely try to pull off the trick of continuing to prepare the groundwork for tapering but try to give bond markets something to help them fight off the pressure of higher yields. With no post-meeting press conference planned for the July 30th/31st FOMC, and Bernanke not scheduled to speak publicly until he appears at the Global Education Forum event on August 7th, this week’s testimony may well be the only remarks we hear directly from the chairman for some weeks.
It’s been a little more than a week since Bernanke’s dovish Q&A at the National Bureau of Economic Research where he reiterated the need for the Fed to remain “highly accommodative” for the “foreseeable future”. Since that time, the S&P500 has added 1.4%, 10yr UST yields have fallen by just under 10bp, the dollar index has weakened 2.5% and the CDX US investment grade index has rallied 4bp. If Bernanke’s intention was to curb the tightening in financial conditions which he alluded to in his Q&A last week, then that has been achieved to some extent over the past week.
Market summary via RanSquawk [37]
Market Re-Cap
Stocks in Europe traded lower this morning, as market participants were seen booking profits ahead of the eagerly awaited semi-annual testimony by Fed’s Bernanke, as well as reacting negatively to less dovish than expected BoE minutes. Also, less than impressive earnings from L’Oreal and various broker downgrades weighed on stocks this morning. The minutes of the most recent BoE meeting revealed a unanimous vote to keep both the APF and the benchmark rate unchanged, as well as refrain from committing to implementing forward guidance. The release noted that while discussion will have important bearing on August 1st decision but "no presumption" there will be a change in policy. In turn, this unwillingness to commit to forward guidance meant that expectations of an announcement as early as August had to be scaled back somewhat, resulting in steepening of the UK curve and broad based GBP strength. Of note, the release of the minutes also coincided with the release of better than expected jobs report, which showed that UK jobless claims fall most in 3-years.
In terms of EU related new flow, German press reports of a EUR 10bln financing gap in Greece were denied by a European Commission spokesperson, who also said that the programme is fully funded for the next. Furthermore, any subsequent gap in the funding of the programme for Greece will be addressed in due course on the basis of facts not speculation. Elsewhere, it was reported that Spain’s opposition Socialists have threatened to call a formal motion of censure against the government of Mariano Rajoy, piling fresh political pressure on the Spanish leader over a slush-fund scandal that has rocked the ruling Popular party.
Going forward, apart from awaiting the release of the pre-prepared text of Bernanke’s testimony, market participants will also get to digest more earnings report release, this time from Bank of America, IBM, Intel and American Express.
Asian Headlines
BoJ Minutes from the June 10th-11th meeting stated that Japan's economy is to return to a moderate recovery path. The minutes also stated that some members said extending longer-term funds via market operations could restrain excessive interest rate fluctuations and could be misinterpreted as change in monetary policy framework.
Chinese Actual FDI (Jun) Y/Y 20.1% vs Exp. 0.7% (Prev 0.3%), the largest increase in 2 years whilst the monthly total was the highest in the data set going back to 1997.
EU & UK Headlines
The minutes of the most recent BoE meeting revealed a unanimous vote to keep both the APF and the benchmark rate unchanged, as well as refrain from committing to implementing forward guidance. The release noted that while discussion will have important bearing on August 1st decision but "no presumption" there will be a change in policy. In turn, this unwillingness to commit to forward guidance meant that expectations of an announcement as early as August had to be scaled back somewhat, resulting in steeping of the UK curve and broad based GBP strength.
UK Jobless Claims Change (Jun) M/M -21.2k vs. Exp. -8.0k (Prev. -8.6k, Rev. -16.2k)
UK Claimant Count Rate (Jun) M/M 4.4% vs. Exp. 4.5% (Prev. 4.5%)
German press reports of a EUR 10bln financing gap in Greece were denied by a European Commission spokesperson, who also said that the programme is fully funded for the next. Furthermore, any subsequent gap in the funding of the programme for Greece will be addressed in due course on the basis of facts not speculation.
Eurozone Construction Output SA (May) M/M -0.3% (Prev. 2.0%, Rev. 1.0%)
Eurozone Construction Output WDA (May) Y/Y -5.1% (Prev. -6.6%, Rev. -6.8%)
US Headlines
Today's semi-annual testimony from Bernanke follows comments made last week at the NBER conference, which were interpreted as a more dovish shift despite Bernanke repeating comments from the June FOMC decisions. No major shift in communication and current policy direction is expected from Bernanke's two-part testimony, and the chairman is expected to reiterate comments from last week although could indicate that the Fed needs to see improvement in data before reducing the rate of current asset purchases.
Four keys for Fed on bond-buying exit - John Hilsenrath. Hilsenrath wrote the Fed plans hinge on economic growth picking up, super-low inflation returning to 2% and hiring staying strong. Hilsenrath added the Fed would rethink its timetable if the economy doesn't deliver on these expectations.
Equities
Stocks in Europe traded lower this morning, as market participants were seen booking profits ahead of the eagerly awaited semi-annual testimony by Fed’s Bernanke, as well as reacting negatively to less dovish than expected BoE minutes. In terms of some of the notable stocks related stories, L'Oreal traded lower by over 3% after the company reported Q2 LFL revenue rises 5.2% vs. Exp. 5.4%. Says currency to have negative 2.8% impact on FY sales and China market is growing steadily. On the more positive note, ahead of Intel's earnings report release, ASML reported Q2 net income EUR 239mln vs. Exp. 205.7mln and raised FY sales target ex-Cymer to EUR 5bln vs. Exp. EUR 4.89bln, which subsequently saw shares trade higher by around 2%.
FX
Broad based GBP strength was observed this morning following the release of less dovish BoE meeting minutes which revealed that not a single policy maker voted for more QE. In spite of lower EUR/GBP cross, amid GBP strength, lacklustre performance by the USD ensured that EUR/USD traded steady for much of the session. The USD is expected to be highly reactive to comments from Bernanke when he begins his semi-annual testimony later on in the session.
Commodities
API US Crude Oil Inventories (July 12) W/W -2600K vs. Prev. -8970K
- Cushing Crude Inventory (July 12) W/W -880K vs. Prev. -2700K
- Gasoline Inventories (July 12) W/W +2600K vs. Prev. -3480K
- Distillate Inventory (July 12) W/W +3800K vs. Prev. 2790K
RBC cuts brent 2013 forecast to USD 106/bbl from USD 109/bbl and cut 2014 forecast to USD 104/bbl from USD 107/bbl.
Barclays chief investment officer for Asia and Middle East Yeo says investors should reduce gold holdings.
There were reports armed men attacked an Egyptian military base in Rafah in Sinai.
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Bulleting Market preview via Bloomberg
- Treasuries mostly steady overnight before report on housing starts and U.S. TIPS auction; Bernanke’s begins two-day Humphrey-Hawkins testimony before the House at 10am ET.
- Chairman Bernanke will have a chance to use testimony to drive home message that winding down asset purchases won’t presage an increase in the Fed’s benchmark interest rate
- U.K. unemployment claims fell at their fastest pace in three years in June. With a general election less than two years away, the government is counting on growth accelerating as inflation continues to erode household incomes
- Bank of America and Morgan Stanley held on to a slim lead over UBS AG in a 2012 ranking of the world’s largest wealth managers
- Firms from KKR & Co. to Goldman Sachs Group Inc. are plowing ahead with plans for closed-end funds that borrow money to amplify wagers on debt securities, even after investors in the newest ones suffer losses from last month’s bond-market rout
- Barclays and four former traders must pay a combined $487.9m in fines and penalties due to an investigation of alleged manipulation of energy markets
- Islamist supporters of Egypt’s deposed President Mohamed Mursi announced fresh protests in Cairo after rejecting the new interim government
- Sovereign yields mostly wider. Nikkei +0.11%, Shanghai -1%. European stocks mostly lower, U.S. index futures lower. WTI crude, gold and copper drop
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DB's Jim Reid continues to preview
As we head into the testimony, Asian markets are lacking any firm direction, led by the soft lead-in from Wall St yesterday. There was positive news on the policy front in China with Premier Li Keqiang telling a forum of advisers and executives yesterday that the government will focus on policy that helps in “stabilizing growth when growth approaches the lower bound". Li also said the government needs “to achieve the pre-determined objective for economic and social development this year set by the Central Economic Work Conference". DB’s Jun Ma notes that the Work Conference’s target was for a growth rate of 7.5%, so he interprets this remark as essentially stating that achieving a growth target of 7.5% remains the bottom line, i.e., the government has not changed its target to 7% or 6.5%.Gains in cyclical Asian equities are helping the Hang Seng (+0.2%) and KOSPI (+1.4%) this morning, but elsewhere the Shanghai Comp (-1%) is seeing losses. Elsewhere in Asia there was little immediate reaction to the latest BoJ minutes, but USDJPY is 0.25% firmer this morning at 99.3. Asian credit spreads are 2-3bp wider and the dollar index is 0.2% firmer.
Yesterday saw the S&P500 (-0.37%) in holiday-mode as it recorded its lowest volume for a Tuesday since the week leading up to the Easter break. Earnings provided mixed news for investors with Goldman Sachs beating EPS and revenue estimates on better investment/lending revenues, but mixed performances in its core divisions saw its stock close 1.7% lower. Coca-cola beat consensus EPS estimates but weaker revenue trends saw the market heavyweight close 1.9% lower. It was a similar story for Yahoo! who reported after the US closing bell that online marketing revenues were weaker than expected. Overall though, the earnings season has started relatively well.
Around 75% of the 38 S&P500 companies have beat EPS estimates and around 60% of S&P500 companies have beaten top-line estimates. We’ll provide our usual earnings tracker table as we get deeper into the US/European reporting season.
Moving on to the European periphery, it’s worth highlighting that the Greek parliament will be voting tonight on a package of reforms that are part of a deal to disburse more funds from international lenders. The reforms include a proposal to put 25,000 public employees in a ‘mobility pool’ which aims to deploy surplus staff to areas with needs. A number of Greek unions have called for a rally outside the parliamentary building this evening and the vote comes not long after the Democratic Left departed from the coalition in protest at the closure of state broadcaster ERT. Tonight’s vote is scheduled just before Thursday’s visit by German FM Schaeuble. Staying in Greece, German newspaper Sueddeutsche Zeitung is reporting that Greece faces a funding gap of as high as EUR10bn citing European Commission officials. According to the report the EU will have to decide whether to increase financing for Greece after the summer break although it’s unlikely to be detailed before German elections in September. Also looming on the horizon is the July 21st deadline imposed by Portugal’s president for the main parties to form a “national salvation pact” to see out the completion of the country’s troika programme mid next year. We also have the latest allegations and pressure on PM Rajoy in Spain continuing to bubble up. So there’s still plenty to keep an eye on in European politics.
The main event today is clearly Bernanke’s testimony. Outside of that, the BoE minutes and labour data are scheduled in the UK. Datawise, US housing starts, mortgage applications and the Fed’s Beige Book are scheduled. A number of company earnings today may be relevant for the macro picture including IBM, eBay, Intel and Bank of America. But it will be the Fed Chairman’s testimony and Q&A that will set the direction for markets today.
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SocGen recaps the key points in a macro context
The discussion of potential costs and risks of highly accommodative US monetary policy was one of the cornerstones of recent testimonies by the Fed chairman to Congress, but the times have changed since chairman Bernanke last intervened in Congress. The road ahead that leads us towards lower unemployment and stronger H2 GDP growth means that the onus will be on tapering today and how the transition can be managed without causing (another) tremor in the bond and mortgage markets. The risk of a disorderly rise in UST long-term yields and resulting tightening in financial conditions was dealt with last week by the chairman who pledged to provide stimulus to the US economy. Emphasising the case for policy accommodation sent equities roaring to new highs while UST yields have stayed remarkably calm. Retail sales data published on Monday led to a flurry of Q2 GDP downgrades but the impact of weaker growth on the labour market has so far proved non-existent. We expect the US economy to accelerate towards the end of Q3 and into Q4, more than the Street expects, and this makes us bullish on the USD and UST yields. It is for Bernanke to represent the balanced view of the FOMC today in the Q&A with the House Financial Services Committee (‘about half’ think it would be appropriate to taper asset purchases this year) but how far he is prepared to commit to a timetable and the modus operandi in his written testimony remains to be seen.
The last three testimonies on monetary policy by the Fed chairman have not been kind to EUR/USD, though the July 2012 edition proved less painful than those in February of this year and last year. To the extent that the market has added short EUR positions over the last week, further downside today may not be obvious. This is not strictly the case for GBP/USD where the details of the MPC minutes could prove far more influential through the reaction in UK/G10 rate spreads. Gilt yields and swaps posted whopping declines yesterday, led by the front-end, attributed to CPI not breaching 3%, but perhaps because of positioning in advance of the minutes today. Sterling, already one of the worst performers vs G10 and EM counterparts this month, faces another torrid session if the BoE MPC minutes drop hints on the introduction of forward guidance in August, though Carney’s first vote may also cause some ripples. The stronger economic backdrop has not brought any relief whatsoever and sellers will continue to dictate flows we suspect until further policy details emerge in August. We also got UK unemployment data this morning.