The Day Ahead: All Eyes on Bernanke

The case could scarcely be made any more clearly that all eyes are on Bernanke today, but the caveat of "potential energy" is very much in order.  That is to say, if it truly turns out to be that Bernanke doesn't offer a new adjustment to the September tapering consensus (perhaps we saw a glimpse of this last week when he said 7.6% unemployment overstates labor market strength) then bond markets won't necessarily be eager to stray too far from the central are of the range trade that's emerged post-June 19th FOMC.  Some sections of the range would be easy to reach if Bernanke stirs the pot a little, while others would be more challenging.

It's strange to have the possibility for "sideways" juxtaposed with more historically significant movement, but the latter remains a possibility in the coming weeks.  Market participants know this, and that makes the intervening time all the more sensitive.  Is September tapering priced in?  How much weaker would we be if it was guaranteed?  How much would we gain if it was pushed back a few meetings?  Where would 2014 kick off in the unlikely event that asset purchases are wrapped up by the end of the year? 

No one has anything better than educated guesses at the moment, and history offers divergent examples.  The last two times we've been in a remotely similar situation, yields either continued higher  before getting back to a choppy long-term downtrend, or moved immediately lower before continuing a longer term uptrend (which ultimately ran into the Great Recession, or who knows whether or not it would have continued!  See below) (For what it's worth, the late 90's drop could have arguably been included here.  It had the same net effect as the 1994 spike, but wasn't included both because of brevity of the rally that set up the generational low):

Bernanke delivers prepared remarks at 10am and then begins the Q&A session, which is where tape bombs may be encountered.  The morning data is a consideration as well.  Housing metrics are once again relevant, but this time due to their risk of confirming 'frothiness' that steels the Fed's resolve to taper.  To be sure, there's much less of a connection here versus labor market and inflation data, but today's Housing Starts report is stronger medicine than yesterday's NAHB sentiment index.  With that in mind, let's take a look at what happens when we zoom in to more recent history between Building Permits and the NAHB Index.

Whereas NAHB looked like the leader in yesterday's chart, Building Permits' rally in 2011 was well on its way before NAHB joined in late in the year.  Every subsequent move was also led by Permits, including yesterday's nonsensical NAHB print (in other words, it's not nonsensical if viewed as playing catch-up to permits).  That would open the door for this morning's data to justifiably surprise to the downside, but it still may be too soon for government data collection to have picked up on the trends (it wasn't too soon for C.A.R.)