Traders are all aTwitter this morning ahead of FOMC chairman Ben Bernanke's semi-annual testimony before a congressional panel.
The general consensus on what Bernanke will say is clear. At the risk of ruining the suspense, the Fed head will say he plans to reduce quantitative easing when the data suggests a sustainable recovery in financial markets. He'll add that inflation is subdued but unemployment remains disturbingly high. QED (dork-joke intended) he's going to print money.
KKM Financial founder and CEO Jeff Kilburg is more tuned into what Bernanke implies than what he actually says. "People get all emotional," suggests Kilburg noting that stocks tanked 5% and rates moved more than 100-basis points in the immediate wake of Bernanke's June press conference. There wasn't anything specific in the text or Q&A but rather a sort of gut feeling that there would be a September taper (a word Bernanke doesn't seem to have used) but the markets acted as though the end of QE in September was a certainty.
"We do have a biopolar Ben and we're actually even more perplexed that we are trading off of their forecast," says Kilburg. "When has the Fed ever forecast anything properly?"
Whether it was Bernanke or over-caffeinated traders at the wheel, something drove yields on the U.S. 10-year Treasury (^TNX) from about 1.6% to nearly 2.75% in less than six days. The ripples passed through stocks which lost 5% and mortgage applications which fell off a cliff.In reaction to the volatility Kilburg suggests Bernanke "came out and hedged himself again" by backing off the decidedly murky stimulus reduction schedule in communications that followed the June 19th presser. The bond and equity markets seem to disagree on the matter. Stocks have recovered smartly but the bond yields have yet to retreat to anywhere near where they were in mid-June.
Meanwhile the dollar has gotten hammered, oil is ramping up, and economic data continues to be distinctly murky.
Maybe the best thing for Bernanke to do is sit Sphinx-like, keep the forecast to himself, and let the market try to read his mind.
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