Today — on the first day of trading in 2014 — the S&P 500 fell 0.9%.
Tomorrow, however, the Fedspeak calendar is packed, thanks to the AEA/ASSA annual meeting in Philadelphia, at which several members of the Federal Open Market Committee are scheduled to speak.
And that should bode well for risk assets, according to Steven Englander, global head of G10 FX strategy at Citi.
“Most likely outcome — reiteration of dovish tapering stance, buying of risk, bond yields back up with equity market gains, USD advances against JPY, commodity currencies, and probably EUR, but more ambiguous response of risk-correlated EM currencies,” says Englander.
FOMC governor Jeremy Stein gets the ball rolling as moderator of a panel discussion beginning at 10:15 AM ET. Philadelphia Fed president Charles Plosser — a voting member on the 2014 FOMC — speaks at 12:45 PM, followed by another Stein speech at 1:15 PM. Elsewhere in Baltimore, Richmond Fed president Jeffrey Lacker speaks at 1:30 PM.
The main event at the AEA/ASSA meeting, a speech by outgoing Federal Reserve chairman Ben Bernanke, is at 2:30 PM.
“There is focus on the Bernanke speech and his likely slant on tapering,” says Englander. “His perspective is important because it will give insight into how the Fed’s center-dovish wing views tapering.”
A big theme in interest rate markets since the FOMC announced the first tapering of its quantitative easing program at its December 18 meeting has been the steepening of forward curves in short-term interest rates as traders pull forward expectations for when the Fed will first hike interest rates, as well as the pace at which they will hike when they do begin hiking.
“Since about December 10th, conversations with leveraged investors suggest that their risk scenario is heavily weighted to the Fed tightening earlier than advertised by forward guidance because economic slack is considerably less than indicated by Fed speakers,” says Englander.
Bernanke and other “dovish” members of the FOMC may wish to take an opportunity to push back on this during Tuesday’s speaking events.
“A consensus from doves — and more surprisingly, hawks — that they are nowhere near to tightening policy rates will take the wind out of the sails of this bearish sentiment,” says Englander.
On the other hand, if speakers do the opposite, markets could be in for some turmoil.
“Were Plosser or Stein in their comments to open an even small window to an early tightening, there would be chaos in the middle range of bond market maturities,” warns Englander, “but we consider this unlikely.”