The equity market didn't do much yesterday leading up to the Fed chairman's press conference at 2:15 p.m. ET to discuss the latest policy directive and the FOMC's updated economic projections.  In the wake of that press conference, however, it rolled over and ended at its lows for the day.

The popular line this morning is that the market was disappointed the Fed lowered its growth projections for 2011, but didn't offer any clear-cut signal that further easing was likely anytime soon.  A few months ago the market was reportedly bent out of shape that the Fed was doing QE2 at all.  Now, it is bent out of shape that QE3 isn't around the bend?

Go figure.

Below is a synopsis of the key insights from the directive and the press conference:

• There was an acknowledgment that the economic recovery has been unfolding more slowly than previously expected due in part to factors that are likely to be temporary in nature and that the effects of commodity price increases will dissipate. Accordingly, the pace of recovery is expected to pick up over coming quarters.
  
• Updated central tendency projections showed the change in real GDP for 2011 to be 2.7% to 2.9% (from 3.1% to 3.3% in April) and 3.3% to 3.7% for 2012 (from 3.5% to 4.2% in April). Separately, the central tendency projection for PCE inflation in 2011 was revised to 2.3% to 2.5% (from 2.1% to 2.8%) and to 1.5% to 2.0% for 2012 (from 1.2% to 2.0%).
  
• The directive indicated the Committee thinks inflation will subside to levels at or below (emphasis our own) those consistent with the Fed's dual mandate. From our vantage point, that acknowledgment was tantamount to leaving the door cracked open for the possibility of further easing measures.
  
• Pressed on the possibility of QE3, Mr. Bernanke said things are different today than they were in August 2010 in that there is no longer a deflation risk and employment growth has picked up.
  
• The Fed chairman said banks regulated by the Fed do not have significant, direct exposure to Greece and peripheral countries (including CDS), but that they, and money market funds, have indirect exposure based on their exposure to banks in core European countries that do have direct exposure to Greece and the debt of peripheral countries.  He added that a disorderly default would assuredly roil financial markets.

Considering there weren't any major surprises in the directive or the press conference, and knowing the market had risen 3.0% since last Thursday's low, the late selling activity had the semblance of a sell-the-news response.

The latter point notwithstanding, the Fed Chairman's demeanor struck us as being less certain than the last press conference. That is probably natural by default seeing how the FOMC had to own up to the economic recovery unfolding more slowly than previously expected and that the Fed does not have a precise read on why the slow pace of economic growth is persisting. At the same time, it doesn't provide any closure for market participants to hear the Fed is in the same position as everyone else of waiting and watching to see what the data bring to make its next move.

It is a fair and defensible position, but nonetheless the market would rather think the Fed is in a position of being ahead of the curve, particularly at this sensitive time. The sense that it isn't creates anxiety among some participants that the Fed isn't necessarily waiting and watching as much as it is waiting and wishing for the data to confirm its temporary slowdown views.

Our thinking is that market participants, in general, are dissatisfied with the thought that they will be handcuffed by the economic calendar for an extended period of time.

On that last point, weaker than expected purchasing managers' surveys in China and Europe and the latest initial claims data are keeping the market imprisoned by thoughts that the temporary soft patch isn't so temporary.  Claims, in particular, are the real sore point as a weak labor sector portends a weak recovery in housing, relatively weak levels of spending, and below-potential GDP growth.

The sum of those fears is that earnings concerns are weighing on stock prices, which is apt to remain the case until participants get a clear line on things with the second quarter reporting season that begins in a few weeks.

In terms of initial claims, they jumped 9,000 to 429,000 (Briefing.com consensus 413,000) for the week ending June 18.  The four-week moving average remained unchanged at 426,250.

Continuing claims for the week ending June 11 slipped 1,000 to 3.697 mln (Briefing.com consensus 3.680 mln).  The four-week moving average came down slightly to 3.710 mln.

This is the claims report that will factor into the June employment report, and with initial claims remaining above 400,000, nonfarm payroll growth will be expected to remain subpar and unable to effect a material change in the unemployment rate.

The New Home Sales report for May (Briefing.com consensus 305,000; prior 323,000) will be released at 10:00 a.m. ET.  It is safe to say that expectations are low surrounding any housing report.

With the S&P futures 1.4% below fair value, and deteriorating after the claims report, it is safe to say as well that there are very low expectations for the start of today's trading.

--Patrick J. O'Hare, Briefing.com

Patrick J. O'Hare is the Chief Market Analyst for Briefing Research, Briefing.com's institutional research service. To request a free trial please email researchsales@briefing.com.