March 1. Post Bernanke comments…

Stocks are selling off (ESH from 1330 to 1320) and fixed income is rallying (TYM from 118-16 to 118-24) in the wake of Bernanke’s comments.  Overall not much new, but the increased emphasis on inflation expectations, the mention of an exit from QE, (and that markets perceive a lessening of QE) all had the effect of weighing on stocks, which in turn supports bonds.  The treasury market was leaning short going into the testimony. 

–Bernanke also cited weak employment and housing, but noted that GDP last quarter hit pre-recession level.  Somewhat interesting coincidence that GDP recovered without labor improvement, while stocks rallied.  It’s a jump to assume cause and effect, although it does seem that official governmental actions thus far have accrued to capital, not to labor.

–I also find this comment interesting regarding QE: “All of these developments are what one would expect to see when monetary policy becomes more accommodative, whether through conventional or less conventional means. Interestingly, these market responses [higher rates, firmer equities] are almost identical to those that occurred during the earlier episode of policy easing, notably in the months following our March 2009 announcement. In addition, as I already noted, most forecasters see the economic outlook as having improved since our actions in August; downside risks to the recovery have receded, and the risk of deflation has become negligible. Of course, it is too early to make any firm judgment about how much of the recent improvement in the outlook can be attributed to monetary policy, but these developments are consistent with it having had a beneficial effect.”     I would note that in 2009 subsequent to March the ten year yield neared 4% in June, then fell back as the economy faltered.  Also in 2010 the ten year yield hit 4% in March…and then fell back as the recovery faltered.  And this year in Feb the ten year yield peaked at just above 3.75%….might we again get a relapse into economic stagnation as oil rises??

Posted on March 1, 2011 at 9:45 am by alexmanzara · Permalink
In: Eurodollar Options

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