At the semiannual testimony to the Congress, Fed Chairman Ben Bernanke said that 'the economic outlook remains unusually uncertain' and the central bank will 'continue to carefully assess ongoing financial and economic developments, and 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'. Other than the 'unusually uncertain' comments, others were similar to the Fed's June minutes. Senators' questions were focused on downside risks to the outlook and what the Fed's measures in case of a double-dip recession. This signals that policymakers lack confidence.
BOE minutes for the July meeting were dovish although there's one member voting for a 25-bps hike. Recent economic data showed that the economic outlook 'deteriorated a little'. Members thought that 'the softening in the medium-term outlook for GDP growth over recent months would put further downwards pressure on inflation, once the impact of temporary factors had waned'. The minutes also unveiled that the committee 'considered arguments in favor of a modest easing in the stance of monetary policy'.
Corporate reports were generally strong as earnings from coca Cola, Morgan Stanley and Wells Fargo beat market expectations. However, these failed to boost sentiment. DJIA and S&P 500 plunged -1.1% and -1.3% respectively.
Oil prices got hammered as the US Energy Department reported surprising increase in crude inventory while gasoline and distillate stockpiles rose more than expected.
Bernanke's comments trigger gold selling. The Chairman's weaker growth outlook spurred deflation worries and led investors to sell gold. The Chairman, however, did not show much worry regarding sovereign crisis in the Eurozone. He said that European leaders have put in place a number of strong measures to backstop the near-term financing needs of euro-area countries. At the same time, the Fed reestablished temporary dollar liquidity swap lines with the ECB and several other major central banks. The Fed believed that 'the existence of these lines has increased confidence in dollar funding markets, helping to maintain credit availability in our own financial system'. The comment might have put off gold bulls as the yellow metal's rally this year has been driven mainly by sovereign crisis concerns.
Although we have a series of economic data today, the focus 'will definitely be on European bank stress tests which will be out after European close. The stress tests, conducted by central banks and coordinated by the Committee of European Banking Supervisors (CEBS), include a total of 91 of the biggest banks, representing 65% of the European industry.
According to the CEBS, 3 scenarios will be discussed in details. The macro-economic scenarios include a set of key macro-economic variables (eg: the evolution of GDP, of unemployment and of the consumer price index), differentiated for EU Member States, the rest of the EEA countries and the US. The exercise also envisages adverse conditions in financial markets and a shock on interest rates to capture an increase in risk premia linked to deterioration in the EU government bond markets.
On aggregate, the adverse scenario assumes a 3% deviation of GDP for the EU compared to the European Commission's forecasts over the two-year time horizon.
The sovereign risk shock in the EU represents a deterioration of market conditions as compared to the situation observed in early May 2010.
A better-than-expected result should further reducing concerns over European debt problems but economists worry that lack of transparency in the report may not truly reveal the situations in European banks.