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Ahead of Wall Street

Monday, August 27, 2012

With the economic calendar relatively on the quite side this week, attention will be on Ben Bernanke as the Fed’s annual Jackson Hole meeting gets underway. The market will be looking for clues in Bernanke’s speech this Friday about another round of bond purchases, setting the stage the stage for the September 12/13 FOMC meeting. Mario Draghi, the European Central Bank president, will also be at Jackson Hole and his speech on Saturday also be closely watched.
 
Investors are justifiably ambivalent about the odds of more QE at next month’s Fed meeting. Minutes of the last meeting appeared to show support for more monetary accommodation. But the economic ground realities at the time of that FOMC meeting on July 31/August 1 were somewhat different from what transpired afterwards. While most economic indicators are still no different now than how they have been in the last few months, but the monthly retail sales and jobs data did show some signs of renewed health.

This has raised doubts in investors’ minds that the Fed may not come through after all. It is this backdrop that has put the spotlight on Bernanke’s speech next Friday at the Fed’s annual Jackson Hole meeting. The expectation is that Bernanke’s speech on Friday will provide more color on the Fed’s latest thinking about the economy, which will help set expectations for next month’s FOMC meeting. The Fed’s Beige Book report on Wednesday will also be relevant to this discussion.
 
Beyond a temporary psychological boost, I am not convinced of the relevance of more Fed support to the U.S. economy. Broad measures of liquidity and interest rates already remain quite favorable, limiting the effectiveness of more easing measures. As such, more QE will do little more than provide a short-term psychological high to the market.
 
In corporate news, investors will be handicapping the impact Apple’s ) patent victory over Samsung in the smart-phone market. In addition to the obvious positive boost to Apple, the development may be beneficial to Microsoft ) and Nokia’s market shares. On the earnings front, Tiffany missed earnings and revenue expectations and guided lower.
 
Sheraz Mian
Director of Research

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