Tuesday, July 17, 2012
The QE question will again be on many investors’ minds today as Ben Bernanke testifies before the Senate Banking committee. Positive earnings reports from Goldman Sachs (GS) and Coca Cola (KO) and a slew economic reports provide the backdrop for today’s trading action.
Monday’s surprisingly weak Retail Sales report provided further confirmation of economic softness that the back-to-back weak monthly jobs reports have been showing lately. In prior episodes of economic weakness – the economy went through such phases in the Spring/Summer months in 2011 and 2010 – the Fed would save the day by implementing monetary easing. And that’s what the market is clamoring for this time around as well. The Fed did come through partly on that count by extending Operation Twist through the end of the year, but the market wants a fresh round of QE.
Bernanke is not going to announce QE in today’s testimony and nobody expects him to do that. But the market will view Bernanke’s emphasis on ‘downside risks’ to the economy in favorable light. The expectation is that Bernanke will come across as dovish in his comments and may be even discuss some of the policy tools at the Fed’s disposal to stimulate the economy. With inflation effectively a non-issue, as today’s June CPI report shows, and all key economic indicators pointing down, many expect the Fed to come through with more easing in its meeting next month. How effective more easing will be in terms of desirable economic outcomes is an altogether different issue. And on that score, many doubt if more QE can do any good given the domestic fiscal issues and global growth concerns.
Bernanke and economic reports aside, we have entered the thick of the second quarter earnings season, with this morning’s basket of reports generally in the positive category. We got a solid earnings and revenue beat from Goldman Sachs despite difficult market conditions. Coca-Cola also came out of expectations on volume strength, though Johnson & Johnson’s (JNJ) revenue and guidance were short of expectations, likely due to currency translation issues. We have Intel (INTC) and Yahoo (YHOO) report after the close today.
Director of Research