The Day Ahead: Cautious Markets Await Bernanke, Obama Speeches

Markets are circumspect in early trading as traders await new data, a speech from Fed chairman Ben Bernanke, and details from President Obama's job plan.

The 10-year Treasury yield firmed five basis points overnight to 1.99%, while the tw0-year yield firmed a basis point to 0.19% and the 30-year yield firmed six basis points to 3.30%.

S&P 500 futures are 3 points higher at 2,225, but Dow futures are 7 points lower at 11,408. The lack of direction follows a major rally Wednesday: the S&P jumped 33 points, or 2.86%, driven by news reports that Obama would unveil a $300 billion jobs package. Speeches from two dovish Fed presidents added some fuel.

BMO Capital Markets had this to say about Obama's 7pm speech to Congress:

"The proposals, which have been largely telegraphed to the media, could tally more than $300 billion, about 2% of GDP. The 2-percentage-point reduction in Social Security contributions to employees this year amounted to about $110 billion, or 0.7% of GDP. That's 1.4% at an annualized rate in H1, but GDP growth still averaged just 0.7% annualized and consumer spending growth was only 1.3%. So, the stimulus might have kept the economy out of recession but clearly did not foster a solid recovery. The President's tax cut proposals are deemed to have the best chance of getting through a Republican-controlled House, but, even then, lawmakers may require offsetting spending cuts."

Meantime, light crude oil is 0.26% higher at $89.59 per barrel, while gold prices are 1.48% higher at $1,844.90.

Key Events Today

8:30 - The Trade Balance is expected to produce a $51 billion deficit for the month of July, versus a $53.1 billion gap in June and a $50.8 billion hole in May. Exports are thought to have rebounded after a weak showing in June, while imports are thought to have been steady.

IHS Global Insight forecasts an exports rebound "with gains across most major subcategories."

By contrast, Citibank said the rebound in exports could be lopsided and soft.

"We think that exports will reverse only a small fraction of the huge June decline because it was centered in chemicals and non- electrical machinery," Citi wrote. "That decline coincided with weakening manufacturing PMI figures from around the globe. Just three out of thirty available PMI diffusion indexes signaled noticeably faster growth in July, while twenty-one showed signs of weaker growth."

Taking a step back, IHS Global notes that trade contributed just 0.1 percentage points to second-quarter growth. They said it should provide "a larger boost in the third quarter as exports rebound and imports moderate."

8:30 - Initial Jobless Claims fell 12k in the final week of August to 409k, while the four-week average bumped up to 410,250 - just up from the July average. Claims are anticipated to remain steady this week, though forecasts range from 400k to 435k.

"There is considerable risk associated with this figure due to Hurricane/Tropical Storm Irene," Citigroup notes. "Heavily ravaged states probably experienced fewer claims, while regions that recovered quickly and reopened offices likely reported greater than usual volume. The storm affected coastal and inland areas along the eastern seaboard from North Carolina to Maine. Damage estimates have ranged from $8 billion to $16 billion."

1:00 - Federal Reserve chairman Ben Bernanke speaks to the Minnesota Economic Club in Minneapolis.

"While the weak August employment report may cry out for more action at the September 20/21 meeting, a deference to a few hawkish members could preclude the Chairman from revealing his bias beforehand (though not from ultimately deciding as he sees fit at that meeting)," said BMO Capital Markets. 

"If any particular options are given prominence in the speech, they are likely to relate to rebalancing, rather than expanding, the Fed's balance sheet - that is, "operation twist" (exchanging short-term securities for longer-term issues) rather than QE3 (buying another boatload of securities)," they added. "The hawks are likely strongly opposed to additional asset purchases out of concern about stoking inflation and excessive risk taking. Meantime, the doves appear dead set against options that are deemed only marginally effective, such as lowering the 0.25% rate on excess bank reserves to spur lending, and are advocating more radical options."

3:00 - Consumer Credit is anticipated to rise $6 billion in July, a figure broadly in line with the $4 billion average seen from December to May. June's figure, a major outlier, was $15.5 billion. 

As with every month, the details are key: installment credit - loans with fixed payments, such as mortgages or auto and student loans - have been responsible for the bulk of recent increases; revolving credit - like credit cards - are in a deleveraging cycle (June's $5.2 billion increase was attributed to fewer payments rather than new pools of demand).

"Consumer credit will be driven in July by the jump in purchases of motor vehicles," said Nomura Global Economics. "For this reason, we expect non-revolving credit to account for nearly all of the increase."

7:00 - President Barack Obama addresses a joint session of Congress on his proposals to create more jobs and help the economy recover.