Federal Reserve Chairman Ben Bernanke fought off numerous queries from a serious, agenda-filled Senate Banking Committee and sent U.S. equity markets into a steep fall on Wednesday.  Media coverage quickly picked up on Bernanke’s “unusually uncertain” capsulization of the economy and used this phrase to characterize the Fed’s position regarding the strength and direction of the U.S. economy.

Bernanke may have appeared uncertain about the economy’s direction, but he was steadfast in the Fed’s commitment to use all weapons at its disposal to prevent a double dip.  Pressed by Senate members to detail the weapons in the Fed’s arsenal, Bernanke played his cards very close to the vest. 

In essence, the chairman did not outline any possible details summarizing the Fed’s position saying, “We remain prepared to take further policy actions as needed to foster a return to full utilization of our nation’s productive potential in a context of price stability.”

Thus far, The Federal Reserve has held the line on near zero interest rates, implemented in December 2008, and on the purchase of troubled mortgage and bonds.  The Fed has spent $1.5 trillion on the products since the recession began.

Despite his direct assertions that an economic downturn was unlikely, Bernanke’s testimony weighed heavily on Wall Street.  The Dow Jones closed down 105 points on Wednesday.  Strong corporate returns have neutralized a series of negative reports concerning employment, manufacturing and housing.

When pressed by the committee, Bernanke stuck to his script.  The chairman said was considering all possibilities but that for the time being the main options remained the purchase of more mortgages and lowering the rate paid to banks to place excess reserves with the Fed.

Senate Republicans would like the Fed to halt the flow of red ink while Democrats favor more stimulus funding to solve unemployment.  Bernanke was cool to both possibilities.

Euro Zone Worries

In his testimony, Bernanke added that problems in the euro zone had unnerved Wall Street and created the uncertainty in investment markets.  Bernanke also cited the slow growth in the employment sector as problematic.

Overnight, the euro zone checked in with surprisingly positive economic news.  A survey from Markit showed improved employment, progress in manufacturing and increased growth in the euro zone.

The Markit Purchasing Manager’s Index surveys 2000 varied businesses in the zone.  The index rose to 56.0 in July, up from 55.5 in June.  Analysts had projected a slight downward turn to 55.0.  Manufacturing rose to a starling 56.5 from 55.6 in June.

The zone’s largest economy, Germany, reported the largest growth in its services sector in three years.  France also reported gains in demand for services.

European markets rose sharply on the release of the Markit survey and carried forward in early morning U.S. trading.

At the June G-20 summit in Toronto, it was decided that countries would pursue necessary budget cuts to reduce sovereign debt.  The U.S. insisted that the member nations continue to pursue growth as part of a successful formula to end the recession.  The growth-trim controversy was the key discussion at the Toronto summit.

While the participants agreed to the concept, they returned home to unleash austerity cuts with little concern for growth.  The avoidance of a strategy to grow alongside the debt reduction has spread beyond the euro zone as Britain, Brazil and India have joined the parade.

On Tuesday, China expressed concern that the euro zone cuts would greatly affect the country’s export balance.  The U.S. has expressed the same concern ever since Greece needed assistance to meet its obligations.

In Monday’s after trade quarterly reports, IBM and Texas Instruments announced lower than expected results.  The surprise announcements sent tremors thought European markers and sent the Nikkei to a 1.2 percent loss as European equities fell for a fifth straight day.

Earlier in the day, the euro had crossed the $1.30 mark and was holding at $1.3029.  Nervous investors seemed to doubt the currency’s ability to handle the results of the stress tests to be revealed on Friday.  The euro was trading at $1.2851 when U.S. markets opened but the slide looked to be continuing.

Director of research at Forex.com, Jane Foley, explained, “We’ve seen risk appetite claw back a fair amount and the market is questioning whether that move is valid.

China Speaks

On Tuesday, China’s Ministry of Commerce spokesperson, Yao Jian, said that the country’s export business would fall as a result of the cuts in he euro zone.  China has enjoyed stellar gains in the first half of 2010.  

In June, exports increased 43.9 percent in year-over-year comparisons and 48.5 percent in May comparisons.  However, imports also rose dramatically and nearly nullified any growth in GDP.

 Yao said that second half export growth would fall to about 16.3 percent yielding a 24.5 percent rise in GDP.  That rise is modest by 2009 comparisons, but wages have been increased in certain areas and the Ministry of Commerce mentioned these changes are detrimental to the export-import ratio.

 According to the International Energy Agency, China has replaced the U.S. as the world’s energy consumer.  China challenged the report saying that Beijing was aggressively pursing replacement of outdated manufacturing plants.

Yao said China is expecting to begin new construction projects to meet the country’s rising consumption expenditures.  With newly increased wages, demand for products has also increased and China will see a significant rise in internal sales.

Seven weeks ago, the euro was staggering.  After creating a $100 billion safety fund, the euro zone has implemented a series of austerity cuts while countries that seemed pitted against each other have pulled together in a common cause to save their troubled currency. 

The originally divisive financial plan, which includes stress testing of the zone’s 100 largest banks, has buoyed the euro.  In overnight trading, the euro reached a two-month high at $1.2970 and seems certain to cross the $1.30 threshold soon. 

On June 7^th, the euro had fallen to $1.1875.  Based upon strong showings at debt auctions in Greece, Portugal and Spain, the euro has stabilized and has moved ahead.  Greece, Spain and Portugal have suffered credit rating reductions by all major credit agencies. 

The European Central Bank’s strong cash position has eased intra-bank trading.  The euro has gained 9 percent since early June and unless the Federal Reserve raises its rates, the dollar may continue to slide against other currencies.  Thus far, the Federal Reserve has hesitated to raise rates because another round of quantitative easing may well be in the offing.

On July 1^st, the dollar fell to 89.96 yen, the lowest rate since December.  The dollar’s 14-year low against the yen is 84.82, struck in November 2009.  After that fall, the Bank of Japan invested 10 trillion yen in the dollar.  Analysts had projected a 90.18 dollar/yen gain by March 2011.

Euro Zone Progress

Following a solid Spanish bond auction, successfully renegotiated wages in Greece and a vote of confidence in Italy, French Prime Minister Francois Fillion addressed the media on Friday.  The Prime Minister stressed that recent weakness in the euro was the result of poor national fiscal policies and not weakness in the euro currency system.

The prime minister allayed fears by asserting that the euro was on the mend.  Fillion pushed Japan to maintain faith in the currency.

“Greece has endangered the credibility of its budgets, but public finances in the EU are no worse than the situation in the U.S/ and Japan,” said Fillion.

In early Friday trading, the dollar continued its 1 percent slide against the euro, the yen and sterling.  Poor economic news and political infighting have caused weakening of the dollar.

A report showing that producer prices fell for the third successive month was released on Thursday.  On top of the Empire State Survey, conducted by the New York Federal Reserve, which shows that New York’s production fell to its lowest rates since December, and a similar report in Pennsylvania, projections for growth have been trimmed.

Goldman Sachs released projections that the euro would rise to $1.35 in the next six to 12 months.  As bond auctions in the U.S. continue weak performances, investors are left to question exactly what is the economic policy in Washington today?

The International Monetary Fund earlier raised predictions of U.S. GDP to 3.3 percent in 2010 and 2.9 percent in 2011.  The nation’s high unemployment rate and steadily climbing foreclosure rates are the chief concerns of the IMF, who suggested that unless these problems were addressed, the likelihood of a double dip is strong.

Following the G-20 Summit in Toronto, euro zone members continued to execute their commitment to concentrate on debt reduction as well as improving financial transparency.  While investors have awaited release of the criteria to be used in the much-publicized stress tests, the euro has shown a steady increase against the dollar.

Since falling below $1.19 for the first time in four years, the euro has made a steady push toward recovery.  On Tuesday, the currency crossed the $1.2663 threshold and appeared steady despite news that Germany, the zone’s largest manufacturer, reported an unexpected slowdown in factory orders. 

The news from Germany was outweighed by the success of the Spanish debt sale on Tuesday.  Combined with low consumer confidence projections from the States and further bad news on the employment front in the U.S. short-term confidence in the euro continues to rise. The euro has had a seven-week winning streak against the dollar.

Euro zone regulators are walking a fine line in deciding what details to release about the upcoming stress tests that will be applied to 91 of the zone’s largest financial institutions.  German Chancellor, Angela Merkel, who has become a strong spokesperson for the euro and the European Union, sees the euro in a much-improved position since the effects of the crises in Greece first evolved.

Last week, the sector was able to repay 442 billion euros n emergency loans, a feat considered unlikely just tow months ago.  The repayment only required minimal assistance from the European Central Bank. 

Stress Tests To Be Released Later in Month

European Central Bank President, Jean Claude Trichet, will face the media on Thursday.  Trichet will be under pressure to convey more information about the tests than he has been prone to do.  At present, lenders can decide what results to publish, a policy transparency advocates oppose.

German Finance Minister, Wolfgang Schaeuble, has said that Germany can deal with publication of results.  Not all euro zone members are up to that task.  Chancellor Merkel affirmed Schaeuble’s pronouncement and added:

“The euro has stabilized.  It’s an important signal that banks are carrying out stress tests and that we’ll have more transparency the system.  And, it’s pleasing that, in contrast to the spring, nearly all countries in Europe are now saying we have to reduce deficits and introduce structural reforms.  Once the measures that we’ve agreed have been completely implemented it’ll mean the euro will be on stronger foundation than before the crisis.”

As the Obama Administration insisted at the G-20, the euro zone needs to not only concentrate on debt reduction but must maintain a commitment to growth.  Merkel may have it right about the zone’s positive direction in terms of austerity cuts but without growth, the zone has inherent weakness.  For this reason, many analysts project a steep fall for the euro prior to year’s end.

Spain beat the clock Thursday morning by successfully selling 3.5 billion euros in 5-year bonds just ahead of Moody’s downgrade of the credit rating in five of the country’s regions.  Surprisingly, the average yield at tender rose just 12 basis points from Spain’s successful May auction. 

On Wednesday, Moody’s announced an upcoming review of Spain’s credit rating.  The success of the bond auction indicates that investors had already factored in the ratings slide. Standard & Poor’s and Fitch had already downgraded Spain’s rating earlier this quarter, but on Wednesday Moody’s said the rating could fall by as much as two levels.

Spain’s Prime Minister has tried to keep the country one step ahead of analysts, many of whom feel the country is headed for a “Greece-type decline.”  Prime Minister Jose Luis Rodriquez Zapatero’s Socialist Party managed to pass austerity legislation in May by the slightest of margins – one vote.  Ever since, support for the Socialist Party has declined.  Much of the dissatisfaction has been focused on proposed reforms to the country’s labor laws.

Spain currently faces a 20 percent unemployment rate.  Adding to the fiscal woes is the fact that the country’s recession recovery has amounted to barely a whisper.  Political opposition to the austerity cuts mounted in June.  The opposition maintains that policy changes regarding unemployment only scratch the surface of a deep hole.

The country must find the means to deal with the reality of minimal growth to offset a decade of inflationary practices and some of the highest levels of household and corporate debt in the euro zone. 

Greece Pains The PIIGS

Comparisons to Greece also continue to haunt Portugal, Italy, Ireland and, of course, Spain.  Kathrin Muehlbronner of Moody’s describes what is happening in Southern Europe.  “The contagion has been so dramatic in the markets in the last few months people forget really what a gulf there is between Spain and Greece… Spain is a very highly credit worthy country,” said the analyst.

In 2009, Spain had a public deficit of 11.2 percent.  Spain’s debt-to-GDP ratio is closing in on 55 percent.  Moody’s says the ratio will rise to 80 percent by 2014. 

Zapatero’s government announced a plan to trim 15 billion euros from the budget by 2013.  The government projects these savings will cut the budget deficit to 3 percent of GDP by 2013. 

Moody’s strongly disagrees, citing the government’s growth projections as unrealistic.  The rating agency projects 1 percent growth from 2010 to 2014.  Government projects 3 percent growth by 2013.  In Wednesday’s report, Moody’s stressed the need for deeper cuts and a revamping of the country’s employment policies.

Labor reform legislation is currently under review by parliament.  Spain has the highest unemployment rate in the euro zone.  Critics say the reform package does not acknowledge the severity of the employment crises.  40 percent of employable Spaniards under the age of 25 are unemployed.

The country is busily finalizing plans to bring the unlisted private banks under one umbrella.  The merger of some of the country’s troubled banks has already cost the government 10 billion euros.  Plans to bring the smaller, private banks under tighter reins through mergers are projected to cost another 30 billion euros. 

Adding to the financial pressure is a July redemption ticket for 16.2 billion euros.

The Obama Administration was hoping to arrive at this weekend’s G-20 Summit in Toronto with proud financial reform legislation that would showcase the country’s commitment to change.  Instead, the reform legislation that was passed by Congress yesterday is an embarrassingly watered down version of the original bill intended to eliminate the possibility of “too big to fail” institutions.

Meanwhile, the European Union members are bringing their own reform packages to the G-20 table.  There are significant differences between the euro zone stance and the position of the U.S.

The G-20 meetings are scheduled for Saturday and Sunday.  On Friday and early Saturday, the G-8, composed of Britain, Canada, France, Germany, Italy, Japan, Russia and the United States, will have preliminary meetings.  What was hoped to be a weekend where countries mapped out a united plan for sustaining the delicate global recovery may instead be a weekend where more economic differences are raised than solutions presented.

Unexpectedly thrown into the tense environment is Beijing’s new, relaxed stance concerning its currency.  The Obama Administration sees China’s move with the yuan as another attempt by the world’s third largest economy to gain a trade advantage.

“The initial signs were positive.  But it is too early to tell whether the appreciation, that will track the market, is sufficient to allow for the rebalancing that we think appropriate,” Obama said on Thursday.

The yuan has risen 0.4 percent against the dollar but has a long way to go.  Analysts suggest that a 25 to 40 percent increase is needed to achieve fair market value.  The Chinese economy is expected to gain 9 percent this year.

Sparks Will Fly

The differences between the U.S. stance and the EU are expected to be sensitive.  The United States would like to see more economic stimulus in Europe but the EU, and especially Germany, the zone’s biggest economy, are determined to undertake deep austerity cuts.

Leading by example, German Chancellor Angela Merkel has announced 80 billion pounds in cuts over the next four years.  Merkel leads the charge against deficit spending that many European leaders feel landed the euro in the tenuous place it is today.  The U.S. sees this position as a threat to the ginger recovery and favors a continuation of stimulus spending. 

In describing the difference between the U.S. for more protracted cuts and stimulus investments to spark jobs and consumer spending, Canadian Finance Minister, Jim Flaherty, said, “That is the delicate balance that we need to try t strike this weekend.”

The Obama Administration’s Treasury Secretary, Timothy Geithner, explained to the BBC that, “Our job is to make sure we’re all sitting there together, focused on this challenge of growth and confidence as paramount.” 

President Obama’s popularity has fallen to his lowest ratings in his short presidency.  Within the past week, he has dismissed his ranking military leader in Afghanistan and been forced to settle for an unpopular and largely indifferent reform package.  At the same time, the BP oil spill in the Gulf of Mexico continues to defile the environment and put hundreds of miles of precious shoreline at risk.

At a time when Americans need strong leadership and a willingness from existing legislators to enact change, political bickering has paralyzed the nation.  The possibility of a double dip recession seems more likely than ever.  

Just days before the G-20 conference in Canada, China’s decision to relax its policy regarding the Yuan is causing foreign holders of U.S. debt to scrutinize the U.S. Treasury market.  And, the U.S. has plenty of debt to go around as the Treasury Department informed Congress that the government’s debt level will cross the $13.6 trillion mark this year.  By 2015, the level is expected to top $19 trillion dollars and more importantly 102 percent of the GDP, a staggering figure even in the Euro Zone.

The U.S. has been fortunate not to feel the pinch of inflation during the recent expansion of debt.  The European financial crisis has helped fuel foreign demand for U.S. bonds, but if demand decreases, yields will be pressured to move higher.

Leonard Santow, managing director of Griggs and Santow, commented, “The big buyers in the last year or two have been from the foreign private investors.  A lot of these probably are there because they feel it is safe to be in the dollar and in Treasury securities.”

Between them, China and Japan hold $1.696 trillion of $4 trillion in U.S. Treasuries held by foreign investors.  Purchases by China and Japan have slowed in the past few months.  Total U.S. Treasuries now amount to $8 trillion.

The benchmark 10-year U.S. Treasury currently yields 3.14 percent.  U.S. inflation is currently running about 2 percent.  If inflation increases to 5 or higher percent a year, treasury yields could ramp up to between 6 and 10 percent per year.  Most of U.S. tax revenue would then be needed to pay for the debt.  Another crisis could loom if GDP fails to grow at a modest 3 percent per year, which would also lower the projected revenue.

Speculators Like The Yuan

One of Beijing’s goals is to become an international financial center by 2020.  The relaxed Yuan policy is a big step in that direction for the world’s third biggest economy.  The government has always maintained a strict hold on its national currency.  The recent shift to a freer Yuan is expected to deepen Shanghai’s currency market.

Raising liquidity and widening spreads are expected to benefit the country’s business environment.  The freer Yuan already has speculators strategizing about the currency’s real and future value.

Companies like UBS and Westpac are already touting the Yuan as an undervalued currency that could rise by as much as 6 percent in one year.  However, investors are now rethinking their positions in the dollar/yuan non-deliverable forwards (NDF).  Presently, investors like a stronger yuan.  On Wednesday, three-month NDF’s were priced for the yuan to increase 0.7 percent over 90 days.

China has not entirely let the horse out of the barn.  The yuan is only permitted to rise or fall 0.5 percent against the dollar and a reference rate set by the bank on any given day.

Even with this controlled exposure, the somewhat freer yuan is expected to elevate trading volumes.

China’s decision to allow its currency to trade more openly looks good at first glance but there may be more to the move than meets the eye.  The immediate effect is that certain G–20 economic leaders may be caught off balance in advance of this weekend’s G-20 summit in Canada.  Monday’s announcement appears designed to give China a more balanced import-export level and to answer public criticism of the nation’s currency policy.

The timing of the announcement, just days before this weekend’s G-20 summit in Canada, may thwart some tough resistance from member nations but conservatives warn it is too early to fully assess the impact.  China’s trade policy has been the focus of many disgruntled G-20 nations heading into the weekend meetings.

The net effect appears to be that companies like GE and Caterpillar with big investments in China will not see much change but companies like Walmart, Liz Claiborne and Target that rely on low cost manufacturing from China may be pinched to keep their prices down.

The Beijing announcement ends a 23-month peg against the dollar and will clear the way for the appreciation of the currency, which many analysts feel is undervalued by 20-40 percent.  Internally, China has been pressured by the labor force to increase wages.  A recent strike at a Honda Plant and 11 suicides at manufacturing giant Foxconn have pressured the government to act and thus spur internal consumer spending.

G-20 Divided Over Austerity Cuts

The move by China may divert some of the criticism that was planned by G-20 members.  Now, the rift may well be centered on the austerity trimming policies of euro zone countries and specifically Germany.  Chancellor Angela Merkel feels political pressure to maintain a somewhat defiant posture about austerity cuts.  The Chancellor has openly rejected advice from President Obama about the depth of euro zone cuts and the timing of trimming measures.

The U.S. feels that the depth of the cuts and the rapid implementation of the austerity plans will send Europe spiraling back into another recession.  Merkel has said that Europe will push for a fast exit from loose fiscal stimulation policies and will state its case at the G-20 with a strong budget consolidation plan.

The United States sees a relatively loose approach as a deterrent to a double dip recession.  China is expected to criticize the U.S. policy at the G-20.  Obama has said that nations, like China, with large export surpluses should change their focus to developing internal consumer spending. The idea that the U.S. consumer can be relied upon to lead the way out of the recession is outdated.  U.S. unemployment stands at close to 10 percent and surveys reveal continued uneasiness on Main Street.

Increased Consumer Spending In China

China’s shift in the yuan policy should help ease trade imbalances among G-20 member nations.  On Monday, global equity markets responded favorably to the move.  The change in policy will raise the cost of goods in China and may make goods manufactured in the west more appealing.

The cost of Chinese manufacturing has already increased 8 percent in the past 12 months.  In early Tuesday trading, the yuan fell slightly as China’s banks moved to purchase dollars instead of the national currency.  On Monday, the currency posted its biggest gain in four years.

In April, China posted its first monthly trade deficit in six years.  In May, the export-import balance returned to positive, but the labor force continues to apply pressure.  The increased labor costs are seen to be subtly impacting export levels, a welcome trend for the west. 

Most likely, this weekend’s G-20 summit will only result in the release of each country’s conceptual policies regarding economic reforms.  At the November summit, specific policies are expected to e stated by each country.

The May Retail Sales Report did little to boost confidence and support government claims of a steady recovery. The sharp fall is the first downward spike since September 2009.  The 1.2 percent fall is the largest since last September and follows an April that was adjusted upward to 0,6 percent. In year-over-year comparisons, retail sales were still up 6.9 percent.

Consumers have expressed concerns about a number of big-ticket exposures, including: 

• Lack of private industry job creation.
• The ongoing housing recession/depression.
• The BP oil spill in the Gulf of Mexico.
• The euro zone turbulence
• Political unwillingness to provide remedies for a host of financial regulatory issues.

As recent polling and elections play out, Americans are wielding the biggest stick of protest; their vote.  Politicians on the Hill are scurrying to cover their bases and are making plenty of noise but not putting meaningful legislation on the table. 

The immediate effect of the retail sales report was a quick drop in equities and a sharp decline in Treasuries.  The report follows last month’s misleading employment report.  Private industry is holding onto cash and not adding jobs.

The biggest decline in consumer spending viciously hit the building supply, garden equipment supplier industries, that reported a 9.3 decrease in sales.  Auto sales and parts sales dropped 1.7 percent.  Not including auto sales, retail sales fell 1.1 percent ion May.  This marks the largest decline in 14 months.

Clothing and clothing accessory sales fell 1.3 percent, but electronics, sporting goods, electronics and appliances increased by 0.6 percent.  Gasoline sales fell a whopping 3.3 percent, the largest fall since March 2009.

Double Dip Cannot Be Ruled Out

Consumer caution is echoed by analysts, who are holding cash in anticipation of a trend.  Lately, equities and currency markets endure dramatic swings within a 24-hour period. 

On Wednesday, Fed Chairman Bernanke uncharacteristically seemed to be selling the recovery to the House Budget Committee.  Thursday, Geithner addressed unrest about the ability of China, whose exports surged in May.

China has initiated a new “buy China” policy that could hurt the U.S. and other manufacturing nations.  However, some global buyers are shifting new orders from China to the U.S. whose dollar is more attractive.

The China Daily recently estimated that the country spent 700 billion yuan or $102.5 billion on imported goods.  Global exporters need a similar figure this year.  Geithner is highly critical of the “buy China” protectionist policy. 

The pressure is on manufacturers to put superior products on the table. In any case, U.S. manufacturers are under pressure and not adding jobs. 

Geithner’s biggest concern is China’s manipulation of the yuan.  The country is manipulating the currency’s value in order to gain an edge in the global export marketplace. Geithner’s only remedy is to ask for legislation that will balance the currency’s value.  These measures could lead to significant increases in import taxes.

Geithner is withholding any recommendation until the G20 issues a report about the yuan to Chinese officials later this month.  Meanwhile, President Obama is attacking BP for their conduct and their fiscal responsibilities.  Millions of UK residents depend on BP dividends for their pensions.  Yet, the President and other politicians are pushing for BP to withhold $10 billion in dividend payments until the Gulf Crises is resolved and money is issued to cover damages.  America’s biggest guns are on the attack and fighting to sustain the recovery and avoid the double dip.  Consumers feel the deck is stacked against the U.S. and are on edge.  The planets biggest spenders are standing pat and dimming the recovery.

On Wednesday, Ben Bernanke spoke to Congress as a report revealing strong export data from China was leaked.  A formal announcement about China’s economy will be released on Thursday.  Global equity markets liked what they heard.  Based on the two events, global markets jumped one percent in three hours.

However, by the end of the day, reality took over and the Dow Jones, which had gained nearly 130 points, closed the day down 40 points.  The S&P settled at 1055, down roughly 2 percent from mid morning highs.  Lately, dramatic late day sell offs are a way of life for investors.  The trend illustrates the overall lack of confidence in markets and the tenuous nature of media based rallies.

The inconsistent news from the euro zone and the devastating consequences of the BP oil spill in the Gulf Coast are just two of the factors keeping investors on edge. 

Behind the scenes, Wall Street reform legislation takes center stage today and European Central Bank President Jean-Claude Trichet is due to address the media.  The beleaguered President will be asked about the ECB’s new policy of purchasing government bonds

Overnight, the ECB announced that interest rates would remain at 1 percent.  The UK announced that interest rates would hold at ½ percent.  France has now joined Germany in calling for a ban on naked short selling as Spain replaces Greece as the country to watch.  Most experts believe restructuring of Greece is a foregone conclusion.

In a change of policy, the ECB had acquired 40.5 billion euros worth of bonds as of last Friday.  The media will certainly press for more information and ask how long the ECB will continue this policy designed to solidify the zone’s financial institutions and stabilize the euro.

Bernanke Sells the Recovery

Bernanke sounded more like a U.S. recovery salesperson than the Chairman of the Federal Reserve.  In his testimony before the House of Representatives Budget Committee, Bernanke stepped out of character to touch on a variety of pressing issues.  A quick summary of the Chairman’s points: 

• The U.S. economic recovery was steady.
• The possibility of a double dip recession was less likely than the possibility of a V shaped recovery.
• Discounted the demand for gold as a flight to safety.
• The euro was showing signs of stability.
• The economy was requiring less government support than in the past.
• The Wall Street reform was absolutely necessary.
• Borrowing costs would remain near zero for a lengthy time period.
• He identified the struggling housing market and commercial property market as two factors holding back a sharper recovery.
• Unemployment would remain high until the real estate markets recovered.

 Some of Bernanke’s more interesting quotes were:

“If (euro zone) markets continue to stabilize, then the effects of the crises on economic growth in the United States seem likely to be modest.”

“We should be planning now on how to meet these looming budgetary challenges.”

“Although the support to economic growth from fiscal policy is likely to diminish in the coming year, the incoming data suggest that gains in private final demand will sustain the demand in economic recovery.” 

“A significant amount of time will be required to restore the nearly 8.5 million jobs that were lost over 2008 and 2009. In this environment, inflation is likely to remain subdued.”

Bernanke was firm that this is not the time to address the budget deficits because the economy was not out of the woods.  The Chairman made it clear that it was time for U.S. banks to take a hard line on pay packages.

China’s May export trade increased by 50 percent in year-over-year comparisons.  Predictions had been a 32 percent increase.  The export data signaled the continued growth of the world’s safest economy.  Combining China’s economic progress and the weaker dollar, oil prices turned upwards.