The Day Ahead: GDP, Bernanke, Consumer Sentiment


Today’s the day traders have been waiting for all week: Federal Reserve chairman Ben Bernanke speaks at the annual Economic Symposium at Jackson Hole, Wyoming. Speculation on whether the chairman will back a third round of quantitative easing has been rampant;  the latest consensus is that he will not. We’ll find out at 10am.

Treasury prices are moving in a positive direction in early trading. The two-year Treasury yield is a single basis point lower at 0.207%, while the 10-year and 30-year yields are each firmer by four basis points at 2.193% and 3.562%.  The Fannie Mae 4.0 MBS coupon is +4/32 at 103-25.

Just over an hour ahead of the opening bell, SP 500 futures are 3.25 points lower at 1,154.25 and Dow futures are 20 points off at 11,110.

Last year’s Jackson Hole speech is regarded as the one in which Bernanke made it clear the Fed was gearing up to give the economy a second shot of quantitative easing, but economists at BBVA said this memory is slightly off and the likelihood of a similar speech this morning is slim.

“The market is looking back at last year’s speech with rose-colored glasses,” they said. “In reality, the Fed chairman would not enact a decision outside of an FOMC meeting.”

BBVA says recent public statements from the Fed suggest this year’s speech will be on balance sheet objectives, including guidance on principal reinvestment and portfolio composition. 

“In last month’s meeting it was made clear that the board will focus on a more traditional mix of holdings, reinvesting principal in treasuries,” BBVA said. In this discussion, the general mix could be adjusted to longer-term treasury holdings or to a more diversified mix of fixed income assets, which will affect market term structure. In effect, this would not amount to an LSAP program though it could be conceived as a form of quantitative easing.”

Meantime, light crude oil shed 0.40% overnight to $84.96 per barrel, while gold prices rebounded 1.53% overnight to $1,789.80. 

Key Events Today:

8:30 – Bad as the advance estimate of second-quarter Gross Domestic Product was, preliminary revisions are expected to be even lower. Economists anticipate April to May growth to come in at +1.1%, down from an original estimate of 1.3%. First quarter growth was even more dismal at +0.4%. With fears of a double-dip recession being the concern du jour, this report is sure to get a lot of play.

“We expect the big downward revisions to be to inventories and net trade,” said economists at IHS Global Insight. “Nonresidential construction spending, state and local construction, and consumer spending should all be revised up. The figures will reinforce the picture of an economy barely maintaining forward momentum, and at risk of tipping back into recession.” 

“The mixture of revisions,” added Nomura, “will likely include higher consumer spending and stronger construction of non-residential structures, which will be outweighed by a slower inventory buildup and a wider-than-expected trade gap.”

Economists at Citigroup look for Q2 GDP at just 0.9%, owing to lower inventories and trade.

“Domestic demand actually should be adjusted higher because construction spending was marked up,” they said. “Still, this report confirms that growth tailed off in the first half and that the weakness was not confined to temporary forces, such as bad weather, supply disruptions, and higher energy prices.”

9:55 – Consumer Sentiment can’t get much worse. At mid-month it fell from 63.7 to 54.9, the lowest of any point since May 1980. President Obama’s approval ratings have dropped to new lows and markets have continued to be volatile, with the Dow Jones Industrial Average declining another 325 points, or 2.92%. Economists could hardly have been more wrong last time around; they now predict a slight uptick to 57, with forecasts ranging from 54.8 to 60.

“The second pass at August consumer sentiment will likely show no significant change,” said forecasters at Citigroup. “The dramatic drop in early August came amid dramatic financial market turmoil. While the daily swings have moderated recently, the negative wealth shock to consumers remains large.”

“Consumers face many headwinds such as poor job prospects, depressed home prices, high food prices, and volatile equity markets, while the European debt issue has reared its ugly head again,” added IHS Global Insight. “Since the mid-August reading, the equity markets have been in a tizzy and fears of a global economic slowdown have increased. However, world oil prices have taken a major hit in the past couple of weeks and this will eventually offer some relief to household budgets at the gasoline pump.” 

10:00 – Federal Reserve chairman Ben Bernanke speaks to the Kansas City Fed conference in Jackson Hole. This is his first appearance since the Aug 9 FOMC meeting. His speech is titled “Near- and long-term Prospects for the US Economy.”

“We do not anticipate that extreme measures, such as QE3, will be suggested in this year’s meeting,” said economists at Nomura, noting Bernanke used his speech last year to describe “additional stimulus” and then followed up by announcing QE2 a few months later.

“The deflation risks that were present at the time of last year’s meeting are absent,” they added. “We expect Chairman Bernanke to reiterate the Fed’s tools for easing and seek to restore confidence in the central bank’s ability to respond to shocks as they arise. He may also explain the role of the Fed’s balance sheet – in terms of size and composition – in monetary policy.”

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