What does Ben Bernanke need to say to get the market's attention? BY JOHN AUTHERS
THE SHORT VIEW MARKET COMMENT BY JOHN AUTHERS
By John Authers
Copyright The Financial Times Limited 2006
Published: December 5 2006 02:00 | Last updated: December 5 2006 02:00
What does Ben Bernanke need to say to get the market's attention? Over the past few weeks, the gap between the Federal Reserve chairman's apparent perception of the US economy, and the view implicit in the going market price of US treasury bonds and the US dollar, has widened sharply. If the current valuations in the market make any sense, traders must accept one of two propositions. Either a) Bernanke is wrong about the economy, or b) he is lying.
Speaking last week, Bernanke was positive about the economic outlook, and said incoming data would determine "whether further policy action against inflation will be required". This would normally be taken as a clear hint that the Fed's next move in interest rates was more likely to be up than down.
The response was to carry on selling the dollar against European currencies, and buying bonds - both moves that make sense if the next move in interest rates is down, not up. The Fed Funds futures market is priced as though the chances of a rate cut in March are above 80 per cent, while a cut by the April meeting is a virtual done deal. The 10-year treasury bond is yielding 4.43 per cent - more than 75 basis points below the Fed Fundsrate of 5.25 per cent.
The market has had problems understanding the new Fed chairman before this year. This was more or less inevitable after Alan Greenspan's reign. Bernanke said he would try to handle communications differently. But in earlier incidents, Bernanke was able to pull the market to heel. In early October, for example, bond yields rebounded when FOMC minutes said the Fed was "skewed towards higher rather than lower rates".
This time Bernanke's words have had no impact. The bond market may be right about the economy. But Bernanke understands better than anyone in the market how he would respond to any given new data. With the next rate-setting meeting due next week, Fed rhetoric must go quiet for a few days. Traders would do well to take the time to consider how strongly they are betting against Bernanke's words.
By John Authers
Copyright The Financial Times Limited 2006
Published: December 5 2006 02:00 | Last updated: December 5 2006 02:00
What does Ben Bernanke need to say to get the market's attention? Over the past few weeks, the gap between the Federal Reserve chairman's apparent perception of the US economy, and the view implicit in the going market price of US treasury bonds and the US dollar, has widened sharply. If the current valuations in the market make any sense, traders must accept one of two propositions. Either a) Bernanke is wrong about the economy, or b) he is lying.
Speaking last week, Bernanke was positive about the economic outlook, and said incoming data would determine "whether further policy action against inflation will be required". This would normally be taken as a clear hint that the Fed's next move in interest rates was more likely to be up than down.
The response was to carry on selling the dollar against European currencies, and buying bonds - both moves that make sense if the next move in interest rates is down, not up. The Fed Funds futures market is priced as though the chances of a rate cut in March are above 80 per cent, while a cut by the April meeting is a virtual done deal. The 10-year treasury bond is yielding 4.43 per cent - more than 75 basis points below the Fed Fundsrate of 5.25 per cent.
The market has had problems understanding the new Fed chairman before this year. This was more or less inevitable after Alan Greenspan's reign. Bernanke said he would try to handle communications differently. But in earlier incidents, Bernanke was able to pull the market to heel. In early October, for example, bond yields rebounded when FOMC minutes said the Fed was "skewed towards higher rather than lower rates".
This time Bernanke's words have had no impact. The bond market may be right about the economy. But Bernanke understands better than anyone in the market how he would respond to any given new data. With the next rate-setting meeting due next week, Fed rhetoric must go quiet for a few days. Traders would do well to take the time to consider how strongly they are betting against Bernanke's words.
posted by Carlos T Mock @ 10:10 AM
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