Federal Reserve Chairman Ben Bernanke delivers his semi-annual testimony to Congress on Tuesday. MF Global Research Senior Interest Rate and Equity Market Analyst Nick Kalivas offers his outlook in his daily research notes.

Thinking about Bernanke’s Testimony

The Fed Chairman is likely to make statements which are consistent with the consensus economic view.  His comments will confirm the idea of a slow economic recovery with GDP working flat toward year end and rising in 2010 to a slow pace.He will acknowledge downside risks, but highlight improved credit conditions, the end of inventory burn, and strong growth in emerging Asia.  He is likely to be cautious about the expansion of entitlements and warn of a dire budget situation. However, he will try to avoid recommending policy suggesting it is Congress and not the Fed which sets fiscal policy and spending priorities.  Here are a few items to think about:

·Nonfarm payrolls have declined every month since January 2008. The lowest reading occurredJanuary 2009 at -741,000.  It is hard to imagine payroll loss getting worse, but the pace of recovery will be muted over the next year.

·Industrial production has declined every month since October 2008, and peaked December 2007. The December 2007 high was 112.4, while the last reading in June 2009 was 95.4

·The ISM non-manufacturing PMI has climbed from its low of 37.4 in November 2008.  However, it has been below 50 every month since October 2008.

·Retail sales have worked up and down in recent months, but the level of sales peaked November 2007 at $379.76 bln.  Sales hit a low of $336.43 bln in December 2008 and were $342.13 bln in June.

·Inventory levels are declining.Business inventories peaked at $1507 bln in August 2008 and stood at $1368 bln in May.  Inventory levels are back at July 2006 levels.

·LIBOR has normalized, and credit spreads have narrowed. However, corporate spreads remain wide.

The economic projections are unlikely to change. The economic projections are less important in the testimony because the Fed releases its outlook in the FOMC meeting notes.