Bernanke Testimony and FOMC Minutes Provide a Roller Coaster Day

Minyanville

Today was very intense due to the overnight policy decision from the Bank of Japan, Bernanke's testimony to the Congressional Joint Economic Committee, and the minutes from the May FOMC meeting. Existing home sales for April rose to an annual rate of 4.97 million from an upward revised 4.94 million the month prior. Economists expected a rise to a 4.99 million annual rate.

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Overnight, the Bank of Japan kept its monetary policy on hold. With regards to the increased volatility in the Japanese bond market, the central bank noted that it is closely monitoring the situation as the market tries to find a new equilibrium point, and plans to meet with market participants next week.

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Fed Chairman Ben Bernanke gave testimony to the Congressional Joint Economic Committee on the current economic situation. The headline risk was that Bernanke said premature tightening of monetary policy risks slowing or ending the recovery, in the context of monetary policy reducing the drags from fiscal policy and reduced accommodation causing inflation to slow to a dangerously low rate. He also mentioned that keeping rates low for an extended period may cause excessive risk taking in some asset markets.

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The May FOMC minutes were released at 2 p.m. ET. Much of what had already been iterated by Fed officials between the decision on May 1 and today was included, such as a reduction in purchases, an excessive reach for yield in some markets, increased corporate bond and syndicated leveraged loan issuance, low inflation but longer-term inflation expectations remaining in check, and fiscal policy causing a drag on growth. The notable mention was that one participant had pushed for reducing purchases at the meeting while another had pushed for increasing. Members were also concerned that a reduction in purchases would harm the inflation outlook.

US equities were whipsawed around all day with the news flow. In the pre-market, equities rallied and continued this positive movement into the opening moments. After Bernanke's testimony in the morning, the S&P 500 rallied to 1688, up 18 points on the day. However, after comments that Bernanke foresaw the potential to reduce purchases between now and Labor Day, Treasuries plummeted with the 10-year yield gaining almost 11 basis points in under five minutes. Participants in the Treasury market were significantly spooked, openly wondering what an actual tapering scenario might entail. Following the release of the minutes at 2 p.m., stocks fell further and finished down almost 1% on the day, one of the few occurrences of such an event this year. Technically, the S&P 500 also left an outside daily bar, which tends to signal reversals.

After the close, Hewlett-Packard (HPQ) beat earnings, reporting EPS of $0.87 vs. $0.81 expectations, although missing on revenues at $27.58 billion vs. $28 billion expectations. The company's projections for full-year and the coming quarter's EPS was also raised. Finally, Hewlett-Packard raised its quarterly dividend to 14.52 cents per quarter as was expected by analysts.

Tomorrow's Financial Outlook

Weekly initial jobless claims will be released in the morning with expectations for a decline to 345,000 from last week's jump to 360,000. The 4-week moving average of claims currently stands at 339,300. The other pieces of economic data include the preliminary national manufacturing survey from Markit with economist expecting a further decline to a reading of 51.2 from 52.1, which would indicate a very small expansion. Lastly, new home sales for April are expected to increase to a monthly rate of 425,000 from 417,000 the month prior.

Tomorrow's economic data from other countries will be the busiest of the week. China, Germany, and the broader eurozone will release purchasing manager indexes. Additionally, the UK will release the first estimate of 1Q GDP with economists expecting no change in annual economic growth from 0.6% last quarter.

Notable earnings will include Advance Auto Parts (AAP), Sears Holdings (NASDAQ:SHLD), ING (ING), Apollo Investment (AINV), Ralph Lauren (RL), Gap (GPS), Ross Stores (ROST), Salesforce.com (CRM), Pandora (NASDAQ:P), Dollar Tree (DLTR), and GameStop (GME).

Twitter: @Minyanville

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