Bernanke Speaks On The Economy

The market is lower in early trading, led down once again by the financials. After their biggest one-day drop in 8 years, the bank index is lower by another -5% this morning amid continuing concerns about banks' capital positions.

GM announced that it is taking steps to bolster its liquidiy position as well, and is cutting its dividend to start, as well as other cost cutting initiatives.

June PPI came in higher than expected at +1.8% (vs. +1.4% consensus), due to the spike in food and energy prices. But inflation concerns don't seem to be hitting bonds today, as prices on the 10-year are higher and the yield is down 10 bps to 3.77%.

Biotechs are one of the few sectors bucking the early weakness, with the biotech index up +1.24%.

Asian markets were down across the board overnight, on banking concerns. The dollar is also lower this morning, pushing gold higher. But oil is also lower, trading near $144. And the VIX has now spiked +8% above the 30 level that many were looking for to signal that capitulation had finally reached investors.

Last, Bernanke is speaking this morning before Congress. His comments have not done much to assuage investors. Here are the highlights of his comments:

• Economic activity has advanced at a sluggish pace during the first half of this year, while inflation has remained elevated
• However, as events in recent weeks have demonstrated, many financial markets and institutions remain under considerable stress, in part because the outlook for the economy, and thus for credit quality, remains uncertain
• Helping the financial markets to return to more normal functioning will continue to be a top priority of the Federal Reserve
• The fiscal stimulus package is providing some timely support to household incomes.
• Over the remainder of this year, output would expand at a pace appreciably below its trend rate, primarily because of continued weakness in housing markets, elevated energy prices, and tight credit conditions.
• Growth is projected to pick up gradually over the next two years as residential construction bottoms out and begins a slow recovery and as credit conditions gradually improve.
• However, FOMC participants indicated that considerable uncertainty surrounded their outlook for economic growth and viewed the risks to their forecasts as skewed to the downside... inflation seems likely to move temporarily higher in the near term
• Our best judgment is that this surge in prices has been driven predominantly by strong growth in underlying demand and tight supply conditions in global oil markets; decline in the foreign exchange value of the dollar has also contributed somewhat to the increase in oil prices; concern that has been raised is that financial speculation has added markedly to upward pressures on oil prices
• Moreover, the currently high level of inflation, if sustained, might lead the public to revise up its expectations for longer-term inflation. If that were to occur, and those revised expectations were to become embedded in the domestic wage- and price-setting process, we could see an unwelcome rise in actual inflation over the longer term.