Lockhart Warns of Excessive Easing, Taming Market Sentiment

By Roger Baettig | August 22 2012 5:03 AM

As macroeconomic data was light on Tuesday, investors continued to focus on speculations of monetary easing measures by central banks. Shares gained in European session and early US session as Spanish bond auctions were well received and a member of Germany's Christian Democratic Union (CDU) said that the government is willing to give concessions to Greece if it complies with key targets. Wall Street climbed higher in the morning session but gains were erased as Atlanta Fed's Lockhart worried that the monetary policy might be too aggressive and he remained undecided on whether additional stimulus is warranted. The DJIA lost -0.51% while the S&P 500 dropped -0.35% during the day. Commodities soared with front-month WTI and Brent crude contracts gaining +0.70% and +0.83% respectively. Gold also jumped to as high as 1643.6 before settling at 1642.9, up +1.23%.

Sponsorship Link

As hopes of further ECB action looms, Spain's auctions of 12- and 18-month bonds were well-received with yields for both securities dropping, to 3.07% (from 3.92%) and 3.34% (from 4.24%) respectively. Meanwhile, market sentiment was lifted amid optimism from Greece. Before discussions among financial leaders regarding Greece's austerity program, Germany indicated that they are willing to offer concessions to Greece. Norbert Barthle, Budget spokesman of the CDU, stated that "small concessions are feasible" if they are inline with the framework of the second aid program. According to Barthle, "for instance, the interest and maturity on loans could be adjusted, as in the case of the first aid package for Greece".

In the US, the market focused on earnings results and comments from Fed members regarding QE3. Retailer Best Buy reported a -91% decline in net income to $12M in 2Q12. The company names a new CEO and suspended profit forecast for the second half of the year. Investors interpreted this as signals that consumer spending in the country is contracting. Comments from Atlanta Fed's President Dennis Lockhart tamed QE3 expectations. He said that "there is a risk to monetary policy being employed too aggressively and without effect to address economic problems that can be resolved only by fiscal reforms that involve making tough choices about the allocation of public resources". He also stated that it's appropriate to keep interest rates at exceptionally low levels through late 2014.

Concerning US oil inventory, the industry-sponsored API estimated that crude inventory fell -6 mmb in the week ended August 17. For fuels, gasoline gained +0.87 mmb while distillate slipped -1 mmb. The report from the EIA/DOE will probably show that crude stock dipped -0.25 mmb, gasoline added +1 mmb and distillate dropped -1 mmb.