What Bernanke Could Say This Week To Really Spook The Market

Ben Bernanke

The big show this week will be a speech on Wednesday from Fed Chair Ben Bernanke.

It’s titled: “The First 100 Years of the Federal Reserve: The Policy Record, Lessons Learned, and Prospects for the Future” and there’s going to be a Q&A.

So he could really talk about anything, including, perhaps, his own future (fingers crossed).

Fedspeak is always a market obsession, but lately that obsession has been turned to 11, given all of the concern about slowing the pace of QE, and how far we are from the first rate hike. Lately the “ZIRP4EVA” crowd has gone pretty silent, and markets are pricing in the possibility of a rate hike sometime in late 2014, in part due to shifts in the Fed’s language, and in part because the pace of job creation has accelerated. In recent months, the economy has been averaging nearly 200K jobs created, which is a nice step up from the approximately 150K pace from months’ previous.

So Bernanke’s speech on Wednesday will be watched ultra-closely.

What will he say?

Citi’s Steven Englander has some thoughts about what he could say that would spook markets the most.

A hawkish Bernanke is much less likely than a dovish one, Hawkish comments could take the form of: 

·         The Fed is not surprised or concerned by the bond market moves 
·         The economy is outperforming their expectations 
·         The Fed does not think the bond market moves will affect activity much 

Most likely his comments take the form  of ‘all according to plan’ and ‘market way too aggressive in expecting FOMC hikes’ which will have be supportive for bond markets and USD negative, but have a half-life of impact until the next major data point.(retail sales on July 15).

At his last press conference, a comment about not being concerned by bond market moves was what really spooked the markets and sent yields soaring.

And since then they’ve soared quite a bit further (though yes, context, 2.7% on the US 10-year is super-low by historical standards).

That being said, if Bernanke really tries to talk down rates, it could give this market yet another shot of fuel.

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