Bernanke calls for more sustainable fiscal policies in his testimony to the congress today. The market was down most of the day and rallied high in the last half hour of trading.Europe stays as the focus as the ECB will announce their monetary policy on Thursday.

The US economy

• US factory orders -0.2% August
• Redbook chain store sales +4.1% (weekly)
• ICSC retail store sales +0.1% (weekly)

The data reported today are mostly flat and does not provide much support to the market. A big news today is Bernanke’s testimony to the congress:

Bernanke calls for more sustainable fiscal policies

In his speech to congress Joint economic committee today, most news sources reported positive comments by Bernanke in regards to more monetary stimulus. After review of the speech we believe that he is more focused on fiscal outcomes and that the fed cannot repair uncertainties caused by inappropriate government policy. Therefore do not expect the feds monetary policy to be as large or as effective as in the past.

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Another factor likely to weigh on the U.S. recovery is the increasing drag being exerted by the government sector. Notably, state and local governments continue to tighten their belts by cutting spending and employment in the face of ongoing budgetary pressures, while the future course of federal fiscal policies remains quite uncertain.

To be sure, fiscal policymakers face a complex situation. I would submit that, in setting tax and spending policies for now and the future, policymakers should consider at least four key objectives. One crucial objective is to achieve long-run fiscal sustainability. The federal budget is clearly not on a sustainable path at present. The Joint Select Committee on Deficit Reduction, formed as part of the Budget Control Act, is charged with achieving $1.5 trillion in additional deficit reduction over the next 10 years on top of the spending caps enacted this summer. Accomplishing that goal  ould be a substantial step; however, more will be needed to achieve fiscal sustainability.

A second important objective is to avoid fiscal actions that could impede the ongoing economic recovery. These first two objectives are certainly not incompatible, as putting in place a credible plan for reducing future deficits over the longer term does not preclude attending to the implications of fiscal choices for the recovery in the near term. Third, fiscal policy should aim to promote long-term growth and economic opportunity. As a nation, we need to  hink carefully about how federal spending priorities and the design of the tax code affect the productivity and vitality of our economy in the longer term. Fourth, there is evident need to improve the process for making long-term budget decisions, to create greater predictability and clarity, while avoiding disruptions to the financial markets and the economy. In sum, the nation faces difficult and fundamental fiscal choices, which cannot be safely or  esponsibly postponed.

But states that inflation isn’t a problem:  We note that he is trying to shift attention away from the feds previous actions causing the commodity inflation we saw over the last year. But the markets think differently and therefore  expansion of the fed’s balance sheet is to be frowned upon.

“Returning to the discussion of the economic outlook, let me turn now to the prospects for inflation. Prices of many commodities, notably oil, increased sharply earlier this year, as I noted, leading to higher retail gasoline and food prices. In addition, producers of other goods and services were able to pass through some of their higher input costs to their customers. Separately, the global supply disruptions associated with the disaster in Japan put upward pressure on prices of motor vehicles. As a result of these influences, inflation picked up during the first half of this year; over that period, the price index for personal consumption expenditures rose at an annual rate of about 3-1/2 percent, compared with an average of less than 1-1/2 percent over the preceding two years.

As the FOMC anticipated, however, inflation has begun to moderate as these transitory  influences wane. In particular, the prices of oil and many other commodities have either leveled off or have come down from their highs, and the step-up in automobile production has started to reduce pressures on the prices of cars and light trucks. Importantly, the higher rate of inflation experienced so far this year does not appear to have become ingrained in the economy. Longer-term inflation expectations have remained stable according to surveys of households and economic forecasters, and the five-year-forward measure of inflation compensation derived from yields on nominal and inflation-protected Treasury securities suggests that inflation expectations among investors may have moved lower recently. In addition to the stability of longer-term inflation expectations, the substantial amount of resource slack in U.S. labor and product markets should continue to restrain inflationary pressures. “

But his conclusion address the future:

 ”Monetary policy can be a powerful tool, but it is not a panacea for the problems
currently faced by the U.S. economy. Fostering healthy growth and job creation is a shared responsibility of all economic policymakers, in close cooperation with the private sector. Fiscal policy is of critical importance, as I have noted today, but a wide range of other policies–pertaining to labor markets, housing, trade, taxation, and regulation, for example–also have important roles to play. For our part, we at the Federal Reserve will continue to work to help create an environment that provides the greatest possible economic opportunity for all Americans”

 

The bottom line

This week looks like a trading week: The global markets are trading lower due to the lack of any monthly support. News continues to be disappointing and uncertainty is paramount. Therefore traders will test support and resistance levels until news of relevance materializes.

Corporate earnings releases coming up

Earning are expected to be poor, but have already been revised. More importantly will be the outlook. An interesting note would be during the second week of October in 2008 when the earnings came out, the market dropped tremendously.

Europe: Trichet talks about easing

Trichet has been very outspoken on his stance for monetary easing, and since inflation numbers were higher than expected last week, and because the problems in Europe are more political, he is not expected to ease policy. The ECB has already made a statement to provide liquidity as necessary to the markets. The ECB meeting will be held on Thursday and new monetary policy, if any, will be announced.

In his speech this year to the parliament, he pointed out

We expect real GDP growth in the euro area to be very moderate in the second half of this year

The risks to the economic outlook, which previously were balanced, are now on the downside.

…monetary expansion remains moderate. Liquidity accumulated prior to the period of financial market tensions continues to be ample but recent data indicate that part of it may be held more for precautionary reasons than for spending.

The risks to the medium-term outlook for inflation were broadly balanced in the eyes of the Governing Council in its last meeting, whereas before they were seen as being on the upside.

On economic governance, there is no doubt that you will make extensive use of tools such as the ‘economic dialogue’ to support economic integration with the required legitimacy. This will open up the process of fiscal and macroeconomic surveillance and, by enhancing transparency, it should encourage Member States to abide by the new rules as strictly as possible

am also confident that, both in the financial supervisory and governance package, you will seize the opportunity of the review clause to go one step further. In 2013 and 2014, you will have a rendez-vous with the Council to take stock and explore possible improvements. This will once again be an occasion to bring forward European integration in key policy areas.

When the Commission put forward the financial supervisory package, the Parliament did its utmost to strengthen the powers of the new supervisory authorities. Here again, you could also count on the support of the ECB.

In my personal view, Europe will need to make significant progress towards political unity with an executive branch and a Parliament, both with extended responsibilities as in any democracy. Part of this executive branch would be a European finance ministry which will be responsible, not necessarily for a large federal budget, but certainly for a strong economic and fiscal surveillance and governance, for the handling of the financial sector and for the external representation of the Economic and Monetary Union.

Canada: Loonie price volatile, market still not showing good sign

The Canadian stock market although rallied together with the US market at the end of the day, still have not recovered from the losses in the previous trading day.

The stock market today

Todays end of day rally amplifies the day traders need to cover positions at the end of the day. The markets closed near resistance and we will see if the break to the upside tomorrow.

Valuations still look high if the economy is softening. We still believe we are not finished seeing the new lows for the year. The only thing we can say for certain is that We are closer to the bottom than we were in July.