Macro Wrap – Bernanke Speaks Again, $SPX, $SPY

by Enis July 15, 2013 7:36 am • Commentary

As I perused the calendar of events for this week, I was surprised to see that Bernanke was speaking again this week.  He will be testifying in front of Congress on Wednesday and Thursday.  The reason for my surprise is that I have seen hardly any mention of this testimony, which is particularly bizarre since Bernanke’s words have been by far the biggest market mover over the past 2 months.

Here is a 2 month intraday chart of the S&P 500 index:

40 day intraday chart of SPX index, Courtesy of Bloomberg
40 day intraday chart of SPX index, Courtesy of Bloomberg

The only substantial down moves in the index in this period (and for most of 2013, for that matter) have been the result of the FOMC minutes released on May 22nd and the FOMC release / Bernanke’s press conference on June 19th (both circled in red).  The move higher last week followed Bernanke’s press conference at the NBER (circled in green).

Given these previous large moves and the fact that Bernanke will be testifying for 2 days this week, I’m intrigued that weekly options are not pricing in a larger move in either direction.  The options market is pricing in about a $2.20 move in the SPY in either direction, or about a 1.3% total move for the week.

One of my favorite Fed watchers, Tim Duy, had a good post on Friday afternoon detailing the divergent opinions now evident among Fed governors.  In his view, the recently discussed 7% unemployment threshold for tapering might have been Bernanke’s own push:

2.) Bernanke is pulling the strings.  Someone brokered a truce at the FOMC meeting that allowed Federal Reserve Chairman Ben Bernanke to lay out the path to ending asset purchases.  That someone must have been Bernanke, indicating that he wanted to introduce the idea that asset purchases would most likely soon be curtailed.  This suggests that Bernanke is pro-tapering.

3.) Bernanke tipped his hand big time.  Bernanke claimed in his press conference that his comments represented the views of the FOMC.  But as I noted earlier this week, the minutes make no reference to his 7% unemployment trigger for ending asset purchases.  So where did that number come from?  Must have been Bernanke revealing his own preference.  This was confirmed today by Bullard:

Tim Duy’s post parses comments from Bullard and Plosser on Friday as evidence for ongoing disagreements.  He lays out a compelling case.  My personal view is that Bernanke wants to begin tapering this year due to his concern about financial instability, but he wants to talk down interest rates at the same time by emphasizing that the FOMC will not be raising the short-term interest rate anytime soon, potentially for years.

In that regard, each Fed event and Bernanke speech takes on heightened importance as we approach the next FOMC release on July 31st.  Considering that there is no major U.S. economic data prior to July 31st (specifically payrolls, ISM, or non-ISM), Fed members are likely already forming their opinion ahead of the meeting.  This next release is particularly important – if the Fed wants to begin tapering in September (September FOMC release is Sept 18th), it will likely have to prepare the market for that step in this month’s release.  Bernanke is clearly driving the global macro train right now.