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Ahead of Wall Street

Tuesday, February 26, 2013

The Bernanke testimony to the Senate Banking Committee and the revival of Euro-zone fears following the stalemated Italian election provide the backdrop for today’s trading action. Early indications are suggesting stocks reversing the losses from Monday. But a slew economic data coming out a little later, ranging from Consumer Confidence to New Home sales and a host of retail sector earnings reports will determine if the gains can be sustained throughout the day.
 
Bernanke’s estimony in the Senate today is about the economic outlook, but the market will be looking for clues to the future of the Fed’s $85 billion a month bond-purchase program. Bernanke’s goal will be to convey some sense of improvement in the underlying economic fundamentals, but also point out the very real downside risks, particularly from policy uncertainty. The budget sequester about to take effect on Friday will also come up, likely in the long-winded statements-cum-questions from the senators. The Fed Chairman is likely to come across as reassuring the markets about the ongoing QE program, whose future became less than clear in investors’ eyes following the release of last month’s FOMC meeting minutes. What the market’s recent jitters tell us is that the Fed was and is central to the stock market gains.
 
The split Italian vote provides us with another reminder that the Euro-zone mess is far from over. The stalemated election result can be interpreted a number of different ways, but the clearest interpretation is the Italians’ rejection of the sensible reformist course put in place by the technocratic government of Mario Monti. Given the split mandate, the country will most likely need to go through another vote in the not too distant future. It may not be a full-blown re-enactment of the Euro-zone crisis, but it does mean that we better brace ourselves for headlines about rising government bond yields in Italy and Spain all over again.
 
Today’s data about New Home sales and the Case-Shiller home price index are expected to further confirm the positive momentum on the housing side. This morning’s earnings report from Home Depot (HD - Analyst Report) and from Lowe’s (LOW - Analyst Report) on Monday reflect the same trend. It will also be interesting if the Conference Board’s Consumer Confidence data rebounds as expected, particularly given the backdrop of higher payroll taxes and rising gasoline prices.
 
Sheraz Mian
Director of Research
 

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