Many traders probably wish they could turn on their television sets at 10 a.m. EDT Wednesday to find former Federal Reserve Chairman Alan Greenspan sitting before Congress. Instead, Ben Bernanke will hold the floor, and his credibility is once again up for review. The markets are hoping the Fed will follow through on the dovish tone set in the June 29 FOMC statement."Any dovishness from Bernanke would be a strong catalyst" for a rally, says Marc Pado, U.S. market strategist at Cantor Fitzgerald. Bernanke is not likely to be dovish about the price of oil, however. While the price of crude finished Tuesday well off its highs -- down 2.3% Tuesday at $73.54 per barrel -- its spike past $77 per barrel last week sent markets into a tailspin. Instead of focusing on oil as an inflationary pressure, high oil prices have become the killer of global growth in traders' eyes. The market is so sure that high oil prices will crimp global growth that even the oil stocks fell as oil was spiking last week. But, Bernanke is unlikely to portray energy prices that way. "Greenspan said energy prices acted as a tax on the consumer," says Art Hogan, chief market analyst at Jefferies & Co., meaning that high energy prices put the breaks on the economy. "I think it is a lot to expect from Bernanke," who focused
Economists forecast both headline and core CPI will rise 0.2% in the month. In May, core CPI increased 0.3% for the third month in a row -- sparking a bout of hawkish Fedspeak and concerns about inflation reaching the upper end of the Fed's "comfort zone." The producer price index, out Tuesday morning, rose 0.5% in June, while core PPI rose 0.2%. The Fed is more concerned with consumer prices. "I think tomorrow will be 30% CPI, 70% Bernanke," says Ashraf Laidi, chief currency analyst at MG Financial Group. But investors should proceed with caution regarding any dollar weakness on the back of Bernanke or CPI, he says. Dissecting the driver of the dollar's recent rally is tricky given the safe-haven flows into the currency amid the global turmoil. The dollar rose 0.28% to 117.28 yen Tuesday, and the euro fell 0.12% to $1.2506. The dollar was supported Tuesday by the surprise 36% increase in net foreign purchases, or $69.6 billion, of U.S. securities in the month of May, according to the U.S. Treasury. The report reflects the global flight from risk in May as the bulk of new foreign purchases was in U.S. Treasury and agency bonds. Investors were relieved by the data, as the foreign lending covers the $63.5 billion trade deficit for the month of May. Still, the Treasury bond market saw some reversal of flight-to-quality flows Tuesday. The 10-year fell 17/32 to yield 5.13%, and the two-year gained 4/32 to yield 5.18%. By highlighting signs of an economic slowdown, the statement accompanying the June 29 FOMC rate hike suggested the Fed wants to pause. The market rallied sharply on the wording of the statement, which answered the market's call for the Fed to acknowledge that it could go too far and stifle the economy too much. Bernanke has several points to choose from on the economic calendar so far this month to highlight the weakening trend.
New signs show that one of the Fed's most discussed sectors, housing, is clearly deflating. A homebuilder confidence index report out Tuesday fell to its lowest level in more than 10 years. The National Association of Home Builders/Wells Fargo Housing Market Index, or HMI, came out at 39, revealing that builders see conditions in the new single-family home market as poor. The HMI reached a cyclical high of 72 in June 2005. The homebuilder stocks were weak Tuesday on the news. D.R. Horton ( DHI), which last week presented a dismal earnings outlook, fell 3.47%, just 29 cents above its 52-week low. Lennar ( LEN) dropped 1.34%, while Centex ( CTX) shares fell 2.15% and Toll Brothers' ( TOL) stock fell 3.08%. From the tech sector, IBM ( IBM) reported strong earnings, sending its stock up 2.48% in after-hours trading. But Yahoo! ( YHOO) disappointed investors, who sent its shares down 8.68% in after-hour trading. As investors seize upon reasons to sell, Merrill Lynch ( MER) beat earnings expectations. But Merrill's shares fell 1.13% on fears that business will get worse at the U.S.' largest brokerage as the global economy weakens and the markets remain volatile. The major averages eked out gains Tuesday as stocks rallied late in the day when oil prices dropped sharply. The Dow Jones Industrial Average gained 0.48% to close at 10,799.23, as the Nasdaq Composite added 0.27% to close at 2043.22 and the S&P 500 gained 0.19% to close at 1236.86. The fed funds futures market increased the likelihood of a rate hike Tuesday, regardless of stock market hopes. Fed funds futures investors put the odds of an August rate hike at 74%, up from 66% Monday, according to Miller Tabak. As investors brace for a possible turnkey trading day Wednesday, Bernanke goes to bed with knowledge of the June CPI report (the Fed generally gets data a day ahead of public release) and hopes that he'll measure up on the
credibility index in the morning.