Fed Chief Bernanke attempted to shift some of the burden from the central bank’s already-wide shoulders by calling on congress to deliver a short-term fiscal stimulus to aid the economy. The widely anticipated speech failed to address further quantitative easing but reiterated much of what the Fed said in its August 9 policy statement. Bernanke repeated that the economy was not in a good place with the S&P downgrade and the congressional debt-ceiling debacle stalling confidence when the economy needed it least. Such shocks reverberated more than would be expected on account of two mountains still standing in the way of recovery. Both the housing market and a credit overhang remain would usually be out of the way in any normal recession, proving that these are abnormal times.
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Eurodollar futures – In terms of market reaction to the speech equity investors are left focused on the real perils facing the economy. The deflection of the problem to congress is likely to spark huge debate this weekend in the media. Treasuries advanced pushing the 10-year yield lower on fears that the economy under unchanged stimulus will falter or at best find more fixed income buyers. The September Treasury note future is ahead by three-quarters of a point driving the yield down to 2.15% while Eurodollar futures are positive on the day. Ahead of Bernanke’s speech came a weaker reading for second quarter U.S. growth as the economy grew at a 1% pace. The first three months of the year recorded expansion of only 0.4%. In the second quarter consumption advanced faster than first thought recording an increase of 0.4% as consumers spent more on financial services, healthcare and insurance. The gain was nevertheless the slowest in a year. Growth was also hindered by slowing exports on account of a deteriorating external environment and a slower build in inventories.
European bond markets – With global equities under continued strain ahead of Bernanke’s address, demand for the safety of German bunds remained. Buyers sent the September contract higher by 52 pips to 135.36 shaving five basis points off the benchmark 10-year yield to 2.13%. Eurozone M3 money supply growth rose slightly less than expected in the three-months through July at a 2.1% pace.
British gilts – Gilt futures were only modestly higher following another lackluster second-quarter growth report. The economy grew at just 0.2% after crawling by half that in the first three months of the year. The 0.5% jump in service sector activity was offset by a similar slide in manufacturing output. Gilt contracts expiring September added 15 ticks to 129.13 to yield 2.44% before Bernanke spoke.
Japanese bonds – Naoto Kan’s promise to announce his resignation on account of shattered confidence in his ability to lead the country through the March crisis was fulfilled Friday. The decision bore little impact on markets leaving government bond yields unchanged at 1.03%. The government also said that after the weekend it would announce measures designed to cope with a rising yen.
Australian bills – Bill futures dipped while Aussie government bond yields fell even after Glenn Stevens told lawmakers that inflation “bears watching carefully.” Government bond yields nevertheless rose as the central banker said that consumer prices could be kept under control. The yield on the 10-year bond eased by eight basis points to 4.37%.
Canadian bills – Government bond futures advanced in-line with gains for U.S. treasuries on the expectation that Bernanke was less likely to announce fresh easing measures. Bill prices advanced shaving five basis points off implied yields while the yield on the 10-year bond contract expiring September fell to 2.37%.
Andrew Wilkinson is a Senior Markets Analyst at Interactive Brokers LLC
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