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Yesterday President Obama said a second stimulus package is not needed, for now. Do you think Ben Bernanke and the Fed will refute the president’s claim in its communiqué today? Not bloody likely!

Obama’s ‘not yet’ on a second stimulus package is intended to assuage China and Japan’s concern over the US budget and the diminishing value of Treasuries.

This suggests that the FOMC Communiqué will be close to the consensus view, which is: no rate change but the Fed will broach the subject of exit strategies because it will aver that the financial system is more stable and there are signs of recovery [Ben’s green shoots] in the economy.

The Fed cannot deviate more than a tad from the consensus view because it could harm bonds, the dollar or stocks. However, the Fed is likely to err on the side of helping bonds and the dollar. This would be consistent with the ‘things are improving’ theme of the solons.

More importantly, if bonds keep tanking, the higher rates will crush any recovery hopes. And the Treasury, after issuing $40B of 2s yesterday, must issue $37B of 5s today and $27B of 7s tomorrow.

If the communiqué is as benign as expected stocks should rally. However the rally should not last more than a day or two because unpleasant fundamentals are reasserting their negative force on the market.

Tuesday’s econ news was mostly negative. Boeing tanked on its delay of its 787 Dreamliner; Rambus tanked on a reduced revenue forecast. Existing Home Sales increased (2.4%) less than expected (3%).

In a Bloomberg TV interview, Edmund Phelps, Columbia professor and Noble Laureate for Economics in 2006, said it will take 15 years for the US to recapture the wealth that it has lost in this crisis.

The dollar sank and most commodities, save gold, jumped on the realization that the Fed is highly unlikely to indicate that is will soon remove the Super Bowl of liquidity.

However, barring increased quantitative easing, the Fed is spent. So bonds rallied and stocks stagnated.

Yesterday’s missive noted that bonds are close to a buy technically. Apparently Goldie sees the setup.

BN: “Long-dated bonds still have a decent rally ahead of them,” Dominic Wilson, senior global economist at Goldman Sachs in New York, wrote in a note yesterday. “Although stabilizing economic news will inevitably prompt talk of exit strategies, we think many policy makers will be at pains to emphasize that they are a long way from tightening.”

Goldman went “long” 10-year Treasury futures, betting yields will fall by between 30 and 40 basis points, Wilson said.

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Today – There will be a flurry after the early impact economic data and then the markets will wait for the Fed FOMC at 14:15 ET. Then there will be the usual post-communiqué wild gyrations/manipulations. If one can force a desired outcome the financial media and most pundits will provide a rationalization for the move that others will ape, no matter how erroneous the justification might be.

Expected economic data: Durables Goods -0.9%, ex-transports -0.5%; New Home Sales (contracts not closings) 360k, +2.3%

Doe Inventories: Crude oil -950k, gasoline 1.0m, distillates 850k, refinery utilization 0.05%

Category: Think Tank

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