Bernanke Met the Press
Although there was another big batch of primarily better-than-expected earnings and some decent economic data, the stock market was really all about the Federal Reserve on Wednesday. First there was the statement accompanying the announcement that monetary policy was once again being left alone, which kept traders happy. And then, more importantly, Mr. Bernanke played ‘Meet the Press’ by holding his first-ever post-FOMC meeting news conference.
Although there was a fair amount of trepidation in front of Ben Bernanke’s historic event, it became clear very quickly that this was a news conference designed primarily NOT to make any news. No, this was about Bernanke continuing to make the FOMC more transparent to both the public and the markets, and to ensure that it would be nearly impossible for anyone to misinterpret the Fed’s plan going forward.
As a scholar, Bernanke knows that the markets don’t like surprises. And unlike his predecessors, this Fed Chairman also understands that the financial markets are an integral part of the economy. Remember, a major impetus for the Fed’s latest QE2 program was to get “asset prices” (which is Fedspeak for stocks and housing) moving higher. Bernanke knew that the consumer was likely to return to the malls if they were feeling better about their 401(k) plans and their mutual fund holdings. And with the economy still on shaky ground, Bernanke figured that getting the markets ‘movin’ on up’ would go a long way toward insuring that a double-dip didn’t happen.
Most analysts will agree that QE2 did its job – at least in terms of getting asset prices moving in the right direction. Sure, there were problems and yes, at least some of the recent commodity price increases can be directly attributed to the Fed’s bond buying program. However, as Bernanke said yesterday, the key last fall was to keep the economy out of a deflationary spiral. And the best way to do that was to put some inflation back into the system.
On the topic of inflation, Bernanke & Co. feel that the vast majority of the recent uptick in the inflation gauges can be tied to commodity prices in general and oil prices in particular. And when asked what the Fed could do about oil prices, the Fed Chairman basically said “not much.” However, Gentle Ben also opined that the causes for the recent uptick in inflation are likely to be transitory and that the FOMC is not worried about a bout of inflation rearing its ugly head at this point in time.
Getting back to the purpose behind the press conference, I’m of the mind that one of Bernanke’s primary goals was to make sure everyone knows what to expect next from the FOMC. In short, Bernanke told us that (1) the Fed will continue the QE2 until its scheduled completion, (2) the cost/benefit is no longer there for another round of quantitative easing, (3) the dollar will reverse course when the economy improves, (4) inflation at 0% is not a good thing, (5) the phrase “extended period” means “at least 2 Fed meetings”, and (6) the Fed has a dual mandate – stable prices (inflation) and maximum employment. And in keeping with their mandate, the Fed will continue to do what it can to make sure the economy improves.
The markets interpreted Bernanke’s comments to be “dovish” as the Fed Chief plans to focus on the economy now and worry about inflation later. In short, this told traders that it’s “game back on” for the current risk trade. So, as expected, the dollar plunged further and stocks, commodities, and the emerging markets enjoyed another jaunt to the upside.
The question, of course, is how long the current game of selling dollars and buying the “risk assets” (stocks, commodities, emerging markets) will last. While it is obvious that no one knows for sure, Bernanke’s game of ‘Meet the Press’ yesterday told us that this “trade” could last for an “extended period” still. As such, look for the stock market to continue to have an upward bias (unless, of course, a “game changer” occurs) and for traders to buy the dips going forward.
Turning to this morning… The normal celebratory pattern of global markets following Wall Street higher overnight didn’t really happen as with the exception of Japan, Asian markets were lower (on talk of a policy change in China) and European markets are less than enthusiastic in the early going. There may also be some concern relating to the earnings report out of P&G this morning. However, the bottom line is some “backing and filling” is to be expected after the past week.
On the Economic front… Initial Claims for Unemployment Insurance for the week ending 4/26 rose by 25K to 429K. This was above the consensus estimate for 392K and last week’s upwardly revised total of 404K. Continuing Claims for the week ending 4/19 came in at 3.641M vs. 3.690M and last week’s 3.709M.
Next up, The government’s initial estimate of the nation’s first quarter GDP shows the economy grew at an annualized rate of +1.8% during the quarter. This was above the consensus expectations for a growth rate of +1.6% but below the Q4 rate of 3.1%.
David D. Moenning
Editor: The Daily Decision
