Last week the market rose into the mid-week Fed Open Market Committee (FOMC) statement and fell after. This week the market rose for one day into the Bernanke pronouncement (breathlessly touted by CNBC) and fell hard after. This is a typical pattern of fading the Fed.
Bernanke’s comments did not inspire nor illuminate. What ZH inartfully described as the “latest compendium of mendacious vomitus emanating from the primary orifice of the Fed chairman” can be summarized in this line from Ben: “The outlook remains unusually uncertain.” A riff on Rumsfeld’s “known unknowns“? Worse, isn’t the Fed culpable at least in part for uncertainty – especially after today? If too much leverage was the cause of the crisis, why would even more leverage be the solution? It appears the Fed is in a trap of its own making.
The market reacted by reading Ben as about to embark on QE2, another round of quantitative easing. The Fed did not elaborate on what action they are prepared to take, but two-year Treasuries made a fourth record low in a week, and commodities popped today, probably on inflation expectations.
Note: given that commodities pooped, it is a useful coincidence that EWI is offering an Energy Free Week for their services. I wouldn’t normally tout this except the jump in commodities today means something dramatic may be about to happen over in the pits. Worth at least checking this out.
Regardless, I believe that the inflationary expectations are ill-guided. Would QE2 drive inflation? Seems unlikely. Some reasons why:
- Mish thinks that Bernanke has met his match with consumer attitudes swearing off more debt.
- The vaunted $1T of new reserves are not waiting to be lent out, but substituting for intrabank loans, so even if the Fed stops paying a nominal interest on them, do not expect the banks to suddenly start lending again – or the consumer to start borrowing.
- Buying more Treasuries or MBS’s will hold down long rates, but even with historically low mortgage rates the housing market is in the dumpster.
To add fuel to the fire of creating unusual uncertainty, Bernanke was ambiguous as to how much QE2 he would actually undertake. As reported by the online WSJ (emphasis added):
Bernanke calls the outlook ‘unusually uncertain’ and notes that the central bank is prepared to take additional action if needed. His economic outlook sees lower than expected inflation and at best a slow pace of falling unemployment levels. He notes financial conditions are hindering growth and expects interest rates to stay low for an “extended period.” At the same time, he says the Fed is continuing to think of ways to shrink its portfolio, and any asset sales will come gradually. Bernanke’s comments to Congress are largely as expected, but some may be a bit taken aback by his comments on shrinking the balance sheet, which doesn’t suggest much central bank appetite to provide additional stimulus to a troubled economy. Stocks are taking it on the chin while the two-year Treasury yield is hitting yet another record low. The dollar is holding pretty steady.
The punditry will opine that stocks fell on the pronouncement, but they were falling all day from the opening gap up. That gap was closed, suggesting an exhaustion gap, a bearish signature. Today’s STU was fairly sanguine about the market, ignoring the Fedspeak altogether and noting that the reversal back up was merely a day long and went back a normal amount for a minor degree wave 2 (60% in the Dow). In addition, they have seen a sharp spike to end rallies since the Flash Crash, and today was no exception: the gap up was due to enthusiasm about the Apple earnings after the close yesterday. The “gotta own it” stock was unable to sustain any sort of rally. After a possible gap down tomorrow, they expect another, smaller rally and then a rollover, which would be the dreaded 3 of 3 of 3 at four degrees.
The bullish Tony Caldaro has a different take:
Looking back, this market has now spent the past two weeks essentially between these two pivots [Sp1058 to Sp1099]. We continue to believe the market is currently building a base after the initial rally from SPX 1011 to 1099. The next couple of days should be important for this potential new uptrend scenario.
The bullish Carl Futia, who also thinks the market is building a base to run to Sp1145-1150 (consistent with the Big Tease count) had expected a start to it today, not the mid-day fade back down. Here is his mid-day chart from yesterday:
Tomorrow will give us a bit of a read, but the real threat is late Friday or next week if the STU Rollover comes to pass.