The Global Markets Weekly – 7/13/12

Posted July 16, 2012 by Editor

Does Bernanke Have Anything Up His Sleeve?

While the stage is ready for Mr. Bernanke’s closeup with Congress this week, there are plenty of other potential pitfalls for investors.  European peripheral problems persist, with the Spanish banking bailout facing two immediate hurdles.  While the German parliament is likely to agree to the program, there is still a chance that Finland might say no.  In addition, the German constitutional court may rule on the use of (German) bailout funds for Spanish banks.  A dragging out of the court decision might reignite market worries.[private]

Bernanke’s presentation this week may be noteworthy as the Fed has been caught up in the widening li(e)bor scandal, having discovering irregularities in 2008.  While they reported their findings to the BoE, did they do enough?  As one market analyst indicated, the libor scandal could be the financial industry’s “tobacco moment.”

Still, Bernanke will have an opportunity to present the Fed’s forecast (which investors already know about).  He tends not to wander off the reservation (like Greenspan sometimes did) because he does not consider himself a seasoned forecaster who knows more than the rest of the FOMC.

The real question is what he is willing to do next in the way of new policy easing.  He appeared to be a reluctant to do more in mid-June when he last spoke to Congress.  The subsequent FOMC minutes reveal a divided FOMC, with “some” even worried that QE3 might do more harm than good.

In fact, “several” members wanted to explore the possibility of using “new tools” to help the economy.  Bernanke may very well even outline what those “new tools” might be.  Could they include a trial balloon to adopt something similar to the BoE brand new funding for lending program?  If so, it is less likely that the Fed will be ready to adopt those new tools at the next FOMC meeting that ends on August 1 and may have to defer to September (or even later) to roll out the new weapons.

• U.S.: The focus of attention will be Bernanke’s Congressional testimony, as we discussed above.  A ton of data is headlined by a weak retail sales report, stable CPI inflation update, steady housing starts and (hopefully) steady regional mfg indexes.
• Eurozone:  Investors will watch for the legislative approval this week of the Spanish bailout from Germany and Finland, with the latter perhaps saying no.  The German constitutional court will weigh-in on the validity of the ESM to help the peripheral banks.  Indicators include a softer HICP inflation, weak German ZEW and Eurozone car registrations and mixed national consumer sentiment readings.
• UK:  The upcoming BoE minutes may reveal splits among the members as all may have not supported the resumed guilt purchases program.  Lower fuel costs will be evident in the headline CPI, with the lowest y/y reading (2.7%) since late 2009.  The various labor market updates this week may be mixed and that earnings power has not benefited from the drop in inflation.
• Central bank roundup:  The BoC will continue to hold rates at 1%, where it has been since September 2010.  While bond markets have been jittery—first pricing in rate hikes in April/May before rate cuts in June/July—evidence still tilts to a policy hold.
• Japan:  After a long holiday weekend, the domestic calendar promises an exceedingly quiet week, featuring only two relatively important releases: some ongoing improvement in the BOJ quarterly Senior Loan Officer Opinion Survey and some recovery in the May all-industry activity release.
• Emerging Markets/Regions:  Two central banks meet this week–Turkey and Mexico. A reduction in the upper band of the interest rate corridor is coming in the former, while easing in Mexico, now or later, remains possible as inflation is expected to decelerate, and a slower U.S. expansion dampens export growth.

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