EmailThe equity market backpedalled on Thursday, reportedly because Federal Reserve Chairman Bernanke tempered expectations about the near-term possibility of QE3. We're going to let that explanation just hang there to let others determine if they want to accept it.
Frankly, we think it is a bit of a stretch since it was never a foregone conclusion, judging by the FOMC Minutes, the chairman's testimony, and recent remarks from Dallas Fed President Fisher, that QE3 was right around the corner.
Of course, if we get to August 2 and there is no deal on raising the debt limit, the Fed could be pressed into enacting some emergency measures to keep liquidity flowing should things get ugly in the capital markets.
That might not be full-on QE3, but the Fed will have its less-than-invisible hand in the mix.
In terms of the debt limit issue, the acrimony between, and among, political parties has sucked some wind out of the market's sails of late as the rhetoric is making a compromise look more and more unlikely before the deadline. President Obama has reportedly given congressional leaders a 36-hour deadline to try and figure out what can be done.
The ratings agencies certainly don't like how things are unfolding on the debt limit issue. One day after Moody's said it is placing the U.S. on review for downgrade, Standard & Poor's placed the U.S. on CreditWatch Negative and said there is a one-in-two likelihood it could lower the long-term rating on the U.S. within the next 90 days.
The market took the S&P headline in stride since it was not a surprise. In fact, the S&P futures held pretty steady and even exhibited a positive disposition in its wake as better-than-expected earnings results from Google (GOOG), Citigroup (C) and Mattel (MAT), and an offer from Carl Icahn to buy Clorox (CLX) for $76.50 per share, distracted participants from the debt limit talk and the question of whether to QE3 or not to QE3.
Still, there is an air of reserve in the futures market on this options expiration day, which is understandable.
The debt limit issue is hanging like a dark cloud over the market and there is uncertainty as to whether it is going to rain down on the market or if the sun will peak through and prevent a rainstorm. In addition, the European Banking Authority is due to release the results of its stress tests at 12:00 p.m. ET.
There is another large batch of economic data to digest today as well, beginning with the CPI report for June and the Empire Manufacturing survey for July.
The CPI report mirrored yesterday's PPI report in that total CPI declined more than expected, falling 0.2% (Briefing.com consensus -0.1%) on the back of a sharp decline in the energy index (-4.4%) and the gasoline index specifically (-6.8%).
Conversely, core CPI jumped 0.3%, which was higher than expected (Briefing.com consensus +0.2%), paced by gains in the indexes for shelter, apparel, new vehicles, used cars and trucks, and medical care.
On a year-over-year basis, total CPI held steady at 3.6% while core CPI edged up to 1.6%. The latter is the highest level since January 2010. As an aside, the Fed's central tendency projection for core-PCE prices for 2011 is 1.5-1.8%.
The Empire Manufacturing survey was a disappointment. Following a negative 7.8 reading for June, the reading for July was negative 3.8 and was accented by a continued drop in the new orders index (-5.5) and a marked downshift in the average employee workweek (from -2.0 to -15.6). A number below zero is indicative of contraction.
The market, though, managed to hang in after the Empire number, due partly we suspect to the realization that the ISM index for June defied a number of weak regional manufacturing surveys that month as well. the Industrial Production (Briefing.com consensus 0.2%; prior 0.1%) and University of Michigan Consumer Sentiment survey (Briefing.com consensus 71.4; prior 71.5) will be released at 9:15 a.m. and 9:55 a.m. ET, respectively.
The S&P futures are currently trading 0.5% above fair value. Entering today's session, the S&P 500 is down 2.6% for the week.
--Patrick J. O'Hare, Briefing.com
Patrick J. O'Hare is the Chief Market Analyst for Briefing Research, Briefing.com's institutional research service. To request a free trial please email researchsales@briefing.com.
