The testimony from Fed chairman Ben Bernanke continues in the Senate today. His opening remarks will be unchanged from yesterday’s testimony to the House, but a new Q&A could push markets in either direction if the chairman offers any surprises. In yesterday's remarks Bernanke made it clear that, contrary to popular phrases, the Fed chairman won't be taking away the punch bowl any time soon.
Assuming today's Q&A is all a repeat of Tuesday, earnings and speculation will drive markets today, as no major data is scheduled for release. The big earnings reports include Morgan Stanley and Boeing.
An hour before the opening bell futures are looking downward, following a 7-day rally that has lifted the S&P 500 up 8.15%. Earnings from Yahoo! and AMD are said to be culprit for this morning’s pessimism, but a positive report from Apple is keeping some investors afloat.
Moreover, when Caterpillar released its better-than-expected report yesterday, the company said in a statement that “fiscal policy and monetary stimulus have been introduced around the world, and we are seeing signs, particularly in China, that they are beginning to work.”
The Real Estate market also received some decent news this morning. The Mortgage Bankers Association reported that even with average rates for a 30-year loan rebounding to 5.31% last week, applications for purchasing and refinancing each increased in the week.
Purchases can be expected to increase as house prices continuing to fall, and at 10 am today the FHFA index of home prices ― the only data scheduled for today ― is likely to show that prices fell 7% year-to-year in May. Markets prefer the Case-Shiller index of home prices to the FHFA, but with nothing else on the docket, it’s possible attention could swing to real estate.
Recap of Bernanke on Tuesday:
Speaking to the House Financial Services Committee, Bernanke said the economy is showing “tentative signs of stabilization,” but while the central bank will be ready to tighten policy responsibly when the time is right, policy will remain “highly accommodative” for an extended period.
"In light of the substantial economic slack and limited inflation pressures, monetary policy remains focused on fostering economic recovery," Bernanke said in his prepared remarks.
Reiterating comments from his Op-Ed in the morning’s Wall Street Journal, Bernanke outlined the Fed’s strategy to drain liquidity from the system and avoid an inflation debacle when the economy recovers. The strategy includes raising interest rates, selling Treasury bills, paying interest on bank deposits at the Fed, and if necessary, selling assets such as long-term securities into the open market.
Bernanke was also committed to fiscal balance: “Unless we demonstrate a strong commitment to fiscal sustainability, we risk having neither financial stability nor durable economic growth,” he said.
Chief US economist Joseph LaVorgna from Deutsche Bank called the testimony a non-event, as Bernanke already published his remarks in the Op-Ed, and last week the Fed’s updated forecasts were published with the FOMC Minutes.
In sum, Bernanke is keeping rates low and policy loose for some time, which should keep markets optimistic. Markets saw a slight dip shortly after 10 am as Bernanke spoke, but that was probably related to his comment that unemployment was likely to remain high into 2011.