We have mentioned in past years that we have clouded memories in the back of our minds of this week in July being significant for market turns. It was something we used to watch when trading equities in the late 90s in the heady bull run of that period and, just eyeballing the chart below (vertical lines indicating this week) we can see it working well nailing some dramatic turns since.
Ok, not every year (last year being a damp squib) but enough for us to be looking out for a turn this week. But why this week of the year and why the response? Well, it's almost as though some chairman of a Federal Reserve somewhere was saying something significant enough to turn markets! Indeed yes, back through the years these are the dates of the summer Humphrey-Hawkins testimonies. No spooky planetary alignment involved, just Al or BB doing their stuff to sound stimulatory or restraining.
We can effectively see this as during down waves in markets and any emergent recoveries, HH has tended to produce up swings as policy was aimed to be stimulatory. During periods of excess, when policy was swinging the other way, we saw turns lower, though 2006 is a clear example of the Fed not seeing what it was getting itself into and effecting policy that just made things worse in the end.
As for tomorrow's impact, we run into this July's HH at full steam ahead for equities (at all time highs in SPX) leading us to feel that a turn obviously will be to the downside. Against that though we really can't see BB being anything other than "balanced" and not wishing to rock the boat.
Our best-fit scenario would be if BB tries to be central in message but (having had a market response that first read him as hawkish at the June statement with respect to tapering, that then swung to reading him as dovish in the post-minute speech) the markets once again over react and this time swing back to reading him as hawkish. That would catalyse our "3rd week in July" turn.
However there is also an extreme version of this "market misreading him as uber-hawkish" risk. If BB were to be asked a question along the lines of "Aren't you worried about equities becoming a bubble?". he may slip on his words enough to create a headline storm along the lines of Greenspan's "irrational exuberance" speech. Stocks would dump in a display of short term fireworks, but no serious long term harm would be done. Meanwhile policy could stay accommodative.
Nice idea, but a dangerous play. But hey, it is his last testimony so why not celebrate it with fireworks.
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