If you were in Europe yesterday, depending on when you left the office stocks were either going down on disappointment that Bernanke gave no new hints of QE3 or they were climbing as Bernanke reiterated that the Fed are prepared to act if needed. We had both interpretations after his testimony but in the end the optimistic one won out and the S&P 500 (+0.74%) closed near the highs of the day.
The initial 10-point fall in the S&P 500 came after Bernanke’s initial prepared remarks which reiterated that the FOMC has not yet arrived at a choice on possible future policy tools and it is pretty much in a wait-and-see mode. The turnaround seemed to come at a time when Bernanke started walking through the “range of possibilities” during the Q&A session. On possible options the Chairman said that there are different types of purchase programmes that could include Treasuries or Treasuries and MBS. Outright purchases aside, the discount window, more communications on the Fed’s future plans and lowering the interest rate on excess reserves were also mentioned.
Interestingly enough when we look back at the same event a year ago the overall theme of his speech was more or less the same with one major difference. In that despite one of the weakest recoveries on record inflation was rising rapidly this time last year thanks to one of the strongest post-recession commodities rallies in history. Indeed CPI was running at 3.6% this time last year versus 1.7% currently. In terms of market reaction the S&P 500 also had a bigger reaction to Bernanke’s event last year with an intraday high of +1.36% after the Chairman said that “the possibility remains that the recent economic weakness may prove more persistent than
expected and that deflationary risks might re-emerge implying a need for additional policy support.” A week after Bernanke spoke last year we saw the highs for H2 2012 (1345) before moving aggressively lower into the low 1100s through AugustOctober as Europe’s problems intensified and the US debt ceiling problems came to a head. One year on and the biggest H2 risks are probably similar. US data is weakening, Europe’s problems could easily come to a head again and the fiscal cliff could become a major issue, albeit slightly later in the year. We also now have a China slowdown to contend with. So the parallels are there.
Back to yesterday, a round of better-than-expected earnings and more encouraging US data also aided the market recovery. Of the 17 companies that reported, 14 of those beat expectations and only 3 missed. In what is perhaps a sign of the times demand weakness is a fairly common theme as sales performance yesterday was less impressive (although a stronger USD also had negative implications for some). Of the same 17 firms only 9 of those exceeded sales forecasts and 8 missed. So there is some evidence of earnings holding up
on better cost controls. Is this partly why unemployment is stubbornly high? Maybe too early to generalise but we’ll watch these numbers.
European weakness was also quite a common theme for those reporting. Intel flagged demand weakness in Europe (and the US) while Coca Cola’s CEO said that Europeans are generally “travelling less, eating out less, driving less and spending less”. I suppose in
financial market terms the phrase ‘less is more’ isn’t a good one!
Back to the macro it was notable that for all the gloominess in the labour market, US housing data continues to surprise on the upside with the latest NAHB index jumping by a sharp 6pts to 35. This brings the series back to the highest since March 2007 after hitting a trough of 8pt in January 2009. Interestingly the S&P 500 Homebuilders index (-0.22%) was moderately lower but the index has outperformed the market sharply this year with a YTD gain of +58.7%. In other data releases headline and core inflation came in broadly in line with consensus and IP was a little bit better at +0.4% vs. +0.3% expected.
In Europe we saw BTP yields back up sharply yesterday on Sicily’s solvency concerns. The 10-year yield spiked around 8bps in late trading to close at 6.045%. PM Monti is pressing for the resignation of the Sicilian Governor and said he will push for spending cuts in the region. Moody’s downgraded Sicily from A3 to Baa2/Negative yesterday this following the sovereign downgrade last week. With a government debt of around €5.3bn at the end of 2011 (according to FT/Bloomberg) the issue is hardly systemic for now but it certainly raised a few eyebrows yesterday.
In other European news we got some additional colour from the ECB overnight on senior bank bondholder haircuts. Draghi said the question of senior bondholders sharing the burden of ailing banks is ‘evolving’ and will further develop with changes to Ireland’s bailout programme. Exact details of what is meant by this are unclear. In terms of the Irish response a spokesman for the Finance Minister said that “there is no question whatsoever of burdensharing with senior bondholders of any Irish banks”.
Back to markets the Asian session is moderately weaker overnight with bourses in China, Hong Kong, Korea and Taiwan -0.2%, -0.8%, -0.6% and -0.6% respectively. The Nikkei (+0.2%) is bucking the trend. Premier Wen said that China’s labour situation will become
more “complex” and the government will continue to implement a more “proactive” labour policy. The better news is that Chinese home prices in June were up in the most number of cities this year with 25 out of the 70 tracked edging higher. Elsewhere, IG credit is around 2bp tighter in Asia, Copper (+0.3%) is slightly higher but Brent (-0.5%) is down for the first time in 6 trading sessions.
In terms of today we can expect the labour market report and the BOE minutes from the UK. In the US, Bernanke Part 2 aside housing data will continue to be the focus. We will get housing starts and building permits. For starts the market is looking for a +37k jump in June which would take the series back to the highest since October 2008. The Fed’s Beige Book today will also shed further light on recent economic performance in various regions. We have a quiet day for European data so Germany’s EU5bn 2-year note auction and a Portuguese bills sale are probably the notable events.
Jim Reid
Strategist
Colin Tan, CFA
Research Analyst
Deutsche Bank
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