Market Gets The Jitters Before Bernanke

Once again the fragile nature of the market’s current optimism was laid bare yesterday when, after a mildly positive day, risky assets stopped on a sixpence and reversed heavily downwards.

The cause was an article in the FT that suggested that the Fed was closer to tapering than the market was giving it credit for. The heavens opened. Soon it became clear that the piece was opinion and not reportage of any particular new light on the story. The market gulped a sigh of relief and promptly pulled higher.

This is the new normal now; a market that is scared of its own tail. The tightrope that the Fed Chair Ben Bernanke will have to walk tomorrow evening is getting increasingly thin whilst the safety net has been replaced by a pit of tigers. The communication of this policy is almost more important than the implementation itself and it starts tomorrow evening.

Yesterday’s slow melt higher for assets was helped by the lack of data due, similar cannot be expected today. UK inflation and German ZEW are good focal points for investors today.

Inflation in the UK has remained above the Bank of England’s targets consistently through the crisis and has not retreated lower like it has in the US or Eurozone. Higher readings of CPI through the summer are likely to remain something that stymies any efforts by the Bank of England’s new Governor to stimulate the economy. We forecast at the beginning of the year that the biggest risk to sterling over the course of 2013 was the appointment of Mark Carney.

Osborne was keen to emphasise in this year’s Budget that help for the UK economy would not come from government but instead from ‘monetary activism’ from the Bank of England. Luckily enough for GBP the improvement in data over the course of the past month or so has allowed the MPC to rein in its determination to further expand asset purchases.

The main argument has to be whether, should we need it, does Carney follow the Japanese way of doing things or instead decides to act like the Fed and use ‘forward guidance’ that should help smooth and configure rate expectations further out without a change in the Bank’s inflation target. Whether this is tied to a growth expectation or an improvement in unemployment will remain to be seen.

CPI in the UK is expected to increase to 2.6% from 2.4% on a slight increase in oil prices of late.

Also set to rise is the ZEW survey of German economic sentiment following a dip caused by concerns over the handling of the Cypriot situation. Despite Bundesbank protestations that the German economy is not performing as it should do the market is looking for an healthy improvement at 10am.