The Day Ahead: European Refi Day, Bernanke at Congress, and 1st Q4 GDP Revision


Markets mostly shrugged off a much-better-than-expected Consumer
Confidence number on Tuesday in favor of a much worse-than-expected
Durable Goods report, at least at the beginning of the day.  Things
exceedingly choppy within the scope of this week’s narrow range
following the scheduled Fed Twist buying and European close, ultimately
leaving MBS and Treasuries very close to Monday’s latest levels.  In
short, it looked like Treasuries were somewhat determined to rally to
recently stronger levels seen on 2/15, but were equally determined not
to exceed those levels ahead of Today’s more significant events.

One of the significant events is the ECB’s second long-term refinancing operation, or LTRO.  Reuters has a thorough write up on the festivities:

(Reuters) – The
European Central Bank is expected to pump half a trillion euros into the
euro zone’s troubled financial system for the second time in as many
months Wednesday in what it hopes will be the last such operation to
fight the euro zone crisis.  Banks can stock up on as much
of the ultra-cheap, 3-year loans as they like at the second of the twin
funding operations – a ploy the ECB unveiled late last year to dampen
tensions on euro zone bond markets that threatened to tear the bloc

used much of the 489 billion euros ($656 billion) they borrowed at the
first LTRO to cover maturing debt. Draghi has urged them to lend out the
funds they tap at Wednesday’s operation to households and businesses,
helping strengthen economic growth.

the liquidity is injected, what will count is if the periphery
countries generate growth,” said Andrew Bosomworth, senior portfolio
manager at PIMCO. “Without growth, the LTROs are a bridge to nowhere.”


LTRO seems to have been somewhat downplayed in terms of market-moving
potential, and indeed that may turn out to be the case.  The important
word is “potential” though…  even if one particular outcome isn’t more
likely than another.  It seems like getting a heads up on however many
hundreds of billions of Euros are doled out at cheap 3-year rates is the
sort of thing that market participants would find informative, and
perhaps even requisite for near-term trading decisions.  Granted, we can
surmise that the final tally will be somewhere within a certain
distance from the €500 bln
estimates, but who wants to bet on that before the fact? And who knows
what the reaction will be to a big miss in either direction?  It’s very
much a “wait and see” affair.  (Incidentally, we’d bet on a higher

The other key event on tap for tomorrow is
Bernanke’s semi-annual report to Congress.  It’s assumed that no policy
changes will be unveiled, and indeed, many are downplaying the
significance here.  But on the first sign of “a clue,” (a clue!  a
clue!), those same skeptics will make haste towards the nearest
bandwagon, we’re sure.  Bottom line, even though market participants
won’t be waiting with bated breathe for new policy announcements,
they’ll certainly be tuned in for “clues,” hints, and leanings.

8:30am, the first revision of Q4 GDP is surprisingly the dark horse of
the day, but could easily shake things up earlier in the day along with
the last major manufacturing report of the week, Chicago PMI at 9:45am. 
Even if the morning data causes a stir, we wouldn’t expect too much of a
break from recent ranges until all the shoes have dropped, with the
possible exception of the Beige Book (which will be part of the overall
consideration if markets aren’t moving directionally by 2pm, and likely
completely overlooked if they are). 

Honorable Mentions:

  • MBA Mortgage Apps at 7am
  • Fed’s Fisher (non voter) at 930am
  • Scheduled Fed Buying, 2036-2042 Maturities at 1015am, concluding 1100am
  • Fed’s Plosser (non voter) at 1pm
  • Annual report on “major foreign holders of US Treasuries” at 4pm. 


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