Global Macro: Same Old, Same Old From Bernanke

Andrew Sachais
July 18, 2013

NEW YORK ( TheStreet) -- Federal Reserve Chairman Ben Bernanke made a point to remain balanced during his testimony before Congress yesterday, as investors perceived this balance as flexibility.

Bernanke introduced nothing new to markets, however, as investors across asset markets that have been tied to the Fed's easy-money policy reacted differently to the news.

The first chart below is of iShares Barclays 1-3 Year Treasury Bond over iShares Barclays 20+ Year Treasury Bond . This pair represents the steepness of the Treasury yield curve.

As the price moves higher, the curve steepens. The pair has corrected back to its trend line over the past few weeks, and was tested Wednesday during the congressional testimony. The trend line indicates the market's belief that bond purchases will begin to slow at September's Federal Reserve meeting.

The pair's failure to break below the trend signals that for all the volatility seen on Wednesday, nothing much has changed regarding expectations of Fed tapering.

The next chart is of iShares MSCI Emerging Markets over Vanguard Total World Stock Index ETF .

Two big catalysts propped up emerging-market equities Wednesday. First, the Chinese Department of Commerce said it was looking into providing the support needed for Chinese import and export markets. With emerging markets, especially Brazil and Chile, playing major roles in trade with China, emerging-equity markets got a big boost. Russia did as well.

The other catalyst was the belief that Bernanke's testimony was more dovish than hawkish. Emerging markets have relied on the easy money and credit terms flowing out of developed economies.

The pair below has set up a near-term bottom and looks to correct soon. Better economic prospects and global growth should allow emerging equities to break out higher.


The last chart is of iShares Barclays TIPS Bond over iShares Barclays 7-10 Year Treasury Bond . This pair measures inflation expectations through Treasury market movements.

Inflation has been subdued for much of 2013, but appears to have set up a bottom reversal in the middle of June. Inflation has outperformed expectations recently, and although it remains below the Fed's target of 2%, expectations continue to trend higher.

A breakout in this pair would be bullish for the dollar because it would give the Fed the justification it needs to rein in easing.

Higher inflation will occur alongside stronger economic data, and the way things are shaping up, the Fed should begin tapering in September.


At the time of publication the author had no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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