The Day Ahead: Sparse Calendar At Home And Abroad

Each of Friday's scheduled events ostensibly have less market moving potency than yesterday's Bernanke testimony.  We can't really confirm that potency considering the relative lack of noticeable market-based response.  Maybe we're down to trading tape-bombs and technicals between now and next weekend...

Or maybe the day and week ahead suggest that they can be better understood by gleaning what we can from Bernanke's speech and applying it to the upcoming trading days.  The fact that the "if/then" understanding that markets have regarding the economy and QE3 (or something QE-like) remains intact or even reinforced, in that Bernanke and other FOMC voters made it clear that additional easing was possible if the situation warrants it.

In that sense, we've gone from sort of mysterious QE possibilities a month or so ago to very real, very contingent possibilities being explicitly discussed by FOMC members.  Lockhart said it best today by actually giving 3 distinct triggers for more easing:

1. "A jobless rise that shows real job destruction"

2. "A further fall in home prices"

3. "Movement toward deflation"

Granted, we know that #3 is/was a hot button for the Fed's initial QE fervor, and history (past and future, actually) will show that such fervor was probably a good idea.  But Ben just today, said that current monetary policy considerations are less about controlling deflation and more about stimulating the economy.  He also acquiesced that such efforts could be subject to diminishing returns.  

While that last part seems QE negative, the fact remains that Bernanke did an exceptionally thorough and diplomatic job of laying out the map to the hidden treasure today.  He explicitly said several important things (not necessarily surprising, but important):

1. Fed has options it can consider, tools to get further accommodation in the economy even though rates are already very low.  

our response: good to know, because even Bernanke acknowledges diminishing returns.  Markets are starting to grumble "out of bullets."  Bernanke's reminding them that they're wrong.

2. Fed has made no decisions, but nothing is off the table

Of course they haven't made decisions.  The meeting hasn't taken place yet.  Of course nothing is off the table, because even if every member were leaning in one direction right now, what a difference two weeks can make in the current day and age!  Good to hear him say it though.

3. If the Fed determines that further action is AT LEAST POTENTIALLY WARRANTED, it would consider costs and benefits of all available actions

Again, we get the message.  But the all-caps bit is interesting in that it seems to suggest the following rewording "If there's any potential justification to stimulate, we'll make sure the economy gets whatever medicine it needs as long as it doesn't do more harm than good."

4. Central question for Fed is whether there is enough growth to make progress in lowering jobless rate

Here's the winner.  Not only does he label this as "the central question" but it lines up well with Lockhart's "jobless rise that shows real job destruction" comment to let us know that the Fed is all about the employment data. To that end, today's International Trade and Wholesale Inventories data has little to offer