Once again turmoil is gripping Europe and is putting downward pressure on oil prices and oil demand expectations. The UK GDP dropped 0.7% and the IFO German business climate index fell more than expected to a disappointing 103.3, dampening the mood of an already depressed marketplace. Yet today the Wall Street Journal is talking up the chances of the Federal Reserve stepping up to the plate with some of that Fed magic to try to pump or print a little ray of sunshine into a dreary market day.
The Wall Street Journal reports that, “Federal Reserve officials, impatient with the economy's sluggish growth and high unemployment, are moving closer to taking new steps to spur activity and hiring. Since their June policy meeting, officials have made clear—in interviews, speeches and testimony to Congress—that they find the current state of the economy unacceptable.”
This kind of article in the Journal is the type of article that could start a market turn-around on speculation that the Journal knows something that we do not. Yet recently traders have felt burnt betting on QE based off of Fed speeches only because recently Ben Bernanke, up to this point, has disappointed them time and time again.
The Journal says that, “Many officials appear increasingly inclined to move unless they see evidence soon that activity is picking up on its own. Amid the recent wave of disappointing economic news, conversation inside the Fed has turned more intensely toward the questions of how and when to move. Central bank officials could take new steps at their meeting next week, July 31 and Aug. 1, though they might wait until their September meeting to accumulate more information on the pace of growth and job gains before deciding whether to act. Fed officials could take some actions in combination or one after another. Fed Chairman Ben Bernanke, in testimony to Congress last week, listed several options under consideration, including a new program of buying mortgage-backed or Treasury securities, new commitments to keep short-term interest rates near zero beyond 2014 or an effort to push already-low benchmark short-term interest rates even lower. Determined to keep trying to get the economy going without causing inflation, the Fed is exploring other novel measures. One idea mentioned by Mr. Bernanke in his testimony would be to use a facility the Fed calls its discount window to provide cheap credit directly to banks that make new business or consumer loans. But it isn't clear such a program would do much good when banks already have ample access to cheap credit and this kind of program doesn't appear to be winning favor at the moment. Mr. Bernanke told Congress he wants to see more progress in reducing unemployment and he expressed frustration the economy appears to be "stuck in the mud." The Fed chairman has spoken in the past about the importance of the economy achieving what he calls "escape velocity"—growth that is fast enough to give the economy forward, self-reinforcing momentum." A must read in the Journal! We will see if this is a precursor to a move today.
We also get today’s Energy Information Agency report on energy inventories. Our demand numbers will be key as it is clear that demand is weakening elsewhere. We did see gas demand hit the highest level of the year but that is kind of like winning $10 in a beauty contest. Still gas supply has been tightening and we could see supply fall below normal for this time of year. We also see Asian demand weak with Japanese refiners in maintenance and China over supplied.