July 13: Bernanke Goes to the Hill – Economic Highlights

The Fed Chief’s testimony to Congress today and tomorrow will dominate the news flow in the market. Coming as it is after the Tuesday release of the minutes of the Fed’s June meeting, Bernanke will likely provide more visbility on how the central bank views the current economic scene and its course of action.

The market will also find it reassuring, at least in the early trading session, the modestly better than expected second quarter GDP numbers out of China. The Chinese economy expanded at a 9.5% rate in the second quarter, just a shade below the first quarter’s 9.7% pace. Importantly, a key measure of manufacturing strengh came out much better than expected.

This would mean that the overall tightening stance from the Chinese monetary and fiscal authorities has had little impact thus far and will likely remain in place at this stage. We found last week that readings of inflation still remained elevated, though expectations are for pricing pressures to start easing in the coming months.

While China has plenty of flexibility in how it deals with its economic situation, the U.S. authorities are not that lucky. The Fed is done stimulating the economy following the end last month of its QE2 program, though with interst rates near zero and the size of its balance sheet unchanged, the overall stance of monetary policy is hardly restrictive.

We found in the minutes of the June meeting a good outline of the Fed’s exit plan, though the reference to some members asking for more stimulus provided a glimpse of the type of debate going on within the FOMC. With the dominant view within the Fed, as elsewhere, expecting an economic turnaround in the coming months and readings of inflation moving in the wrong direction, the odds of further quantitative easing are quite small, though they are definitely not non-existent as the minutes showed.

A couple of more jobs reports like the last two monthly non-farm payroll readings will strengthen the case for more Fed action. It is doubtful, however, what utility further Fed easing will have for the broader growth scene. I would be looking for some questions along these lines from the Fed chief in his testimony on the Hill.

Today’s economic releases include Crude Inventories which is scheduled for release today at 10:30 AM EST, and the Treasury Budget which is expected today at 2:00 PM EST, with an anticipated deficit of $60.7 billion, following the reported $57.64 billion deficit in May.