Macro Morning: Waiting for Bernanke


Not much matters in the next 24 hours other than the words Fed Chairman Bernanke utters tonight up on Capitol Hill. There is plenty of room for clarification of last week’s clarification of the difference between a taper and an interest rate rise. There is plenty of room for obfuscation if lawmakers press him too hard on one or many points and there is plenty of room for market confusion and volatility because the Chairman is going to be in front of the microphones and cameras for such an extended period tonight – and of course there is room for clarification tomorrow night if the market gets the wrong end of the stick.

So there is a fair chance that we get a bit of volatility over the next 48 hours in both directions across a range of markets.

Indeed last night we saw a bit of a pull back in stocks  in the US in the run up to the talk and in the face of the all-time high in the S&P as I highlighted yesterday.

I guess it makes sense for the S&P to both back away from the high and for traders to lighten their load in the run up to Fed Chairman Bernanke’s address and questions tonight up on Capitol Hill. This is particularly the case given that inflation data last night in the US showed less risk of deflation (+0.5% in June and +1.8% yoy) while industrial production (+0.3%) and capacity utilisation (77.8%) were both a little better than expected and as such give less risk that Septaper will be delayed.

Indeed the above is consistent with what noted Fed watcher Jon Hilsenrath wrote in an article overnight:

The Fed’s plans hinge on economic growth picking up, super-low inflation returning to 2% and hiring staying strong. But the Fed would rethink its timetable if the economy doesn’t deliver on these expectations.

He wrote a much more detailed article but I think the above encapsulates the key theme and accords with my thinking as well. At present I’m watching jobless claims and the big jump last week as a potential derailer of Septaper but for the moment it still seems to be coming.

Anyway at the close the S&P 500 was down 0.39% or 7 points to 1676, the Nasdaq of 0.21% and the Nasdaq off 0.24%. Clearly these moves are about Bernanke because the data was ok and the NAHB home building index was at its highest level sine 2006.

Over in Europe the weak data leaves no one in any doubt just how bad the economy is doing among the 17 nations that make up the zone (well perhaps with the exception of euro traders) and stocks were lower across the board with the FTSE 0.46% lower, the DAX fell 0.41%, the CAC fell 0.71%, Milan was down 0.43% and the IBEX was 0.73% lower.

On FX markets it was positioning that drove most of the action overnight particularly in the Australian dollar which caught a huge lift on what I think was or is an erroneous reading of the RBA’s intentions toward more rate cuts next month and in coming months.

I confess to reading something that said the Board was pretty happy with where things were, thought the Aussie dollar was still “remained at a high level” and that:

it was possible that the exchange rate would depreciate further over time as the terms of trade and mining investment declined, which would help to foster a rebalancing of growth in the economy.

But the market focussed on the paragraph that said:

Given the exchange rate adjustment that was occurring, and with the substantial degree of monetary stimulus already in place, members assessed the current stance of policy to be appropriate for the time being.

The result was that the AUD ran up above 0.9250 this morning and sits at 0.9237 after a low of 0.9082 yesterday.

There is no point me arguing with the market move, that would be silly and counter to my process but I do believe that the NAB survey and employment data since the meeting suggests more not less chance that the RBA will be cutting again soon – perhaps in a couple of weeks. Rather, the focus is clearly that the market is still very short, as I noted yesterday morning.

The other thing I noted yesterday was that the Aussie would probably get a lift from the minutes and that a “move through 0.9120/30 would open up decent topside run” but I still managed to get myself caught short which is a bit silly when you think about it and highlights the difference between rhetoric and trading once again. I have given myself an upper cut and we move on.

aud, audusd, australian dollar, australian dollar price quote, audusd 4 hour

As you can see in the chart the Aussie is back in the top half of the Darvasian box it has been in on the 4 hour charts for a while now. It remains the case that a break of 0.9330 is required to turn the outlook back to the topside but after the trade below 90 cents on Friday night if this happens it will be one heck of a reversal and shorts will be scrambling, if it happens.

On other FX markets even though the ZEW survey of economic sentiment in Germany printed weaker than expected at 36.3 and down from last month’s 38.5 and even thought EUR export and import data released last night was weak, the euro managed to stage a rally mainly because of USD position squaring I reckon. As discussed yesterday positioning  is, or probably now was, very US bullish and bearish the AUD, JPY, GBP and EUR making traders nervous in the run up to Bernanke tonight.

But as I discussed above, even though the Fed Chairman is likely to continue to push his nuanced argument between taper and low rates – which is of course a risk to the USD bull case short term – the data last night reinforces the economy is readying itself for the taper or at least is no longer an impediment.

Anyway in any real sense the euro needs to break 1.3220 now which is last week’s high to kick on significantly after clearing short term resistance last night. GBP similarly broke short term resistance but needs to clear 1.5225 to kick on.

jpy, usdjpy, yen, dollar yen (jpy) price quote

Dollar/yen is looking a little precarious and at risk of a deeper move lower which might be a warning for a bigger USD move 98.80 remains the short term key as noted yesterday and the overnight low was 98.88.

On commodity markets gold was up a little, oil and copper down while corn and soybeans were higher


Today we see the Westpac Leading Index in Australia, BoE minutes and employment data in the UK, before Mortgage Aps and building permits in the US along with housing starts, the Beige Book and the EIA crude stocks which has been responsible for the crude surge recently.

Twitter: Greg McKenna

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  1. migtronixMEMBER

    What to trade? Volume is anemic. Futures are are turning bearish on crude, long transport? Lets see if QAN or TOL gets a lift

  2. Seems like the US economy is going from strength to strength. Could be wrong, but for the first time in 5 years the Fed actually seems confident about the outlook.

    • yeh theres some tentative signs of inflation picking up, lets hope things start normalising with some tapering soon. pretty sick of hearing of bernanke and taper everyday on most news services.

      • Funny thing is, I don’t think Bernanke has ever actually used the word ‘tapering’. It’s the word the reporters have used because the Feds message has been so hard to get across.

        How do you describe a policy of balance sheet expansion/easing (albeit at a slower rate) in the face of an improving economy? Tapering isn’t the first thing that comes to mind.

      • Deus Forex Machina

        Not sure if he has used taper but its such a great word – now that I know what it means at least 🙂

      • thomickersMEMBER

        I love the wiki “sports” definition of taper.

        ‘In the context of sports, tapering refers to the practice of reducing exercise in the days just before an important competition’.

        Is Bernanke preparing for important competition?