Update 1:05 p.m.:

One thing we have learned for certain is that what happens one day in this market means nothing to what happens next.

Update 12:00 p.m.:

One thing that is not "unusually uncertain" is the stock market is not happy with Ben.  The Dow is now down 160 points in heavy selling.  We'll need to see some last-hour heroics to prevent an ugly close.

Meanwhile in bondland, prices have soared on the long-end with Ben's inflation outlook.  The 2-year is .56%, the 5-year 1.64%, and the 10-year 17/32s to yield 2.89%.  The 30-year bond yield is down to 3.90%.

Update 11:05 a.m.:

Bernanke's prepared text has been released, and there were no bombshells.  His best line was that the economic outlook was "unusually uncertain."  In other words, he is a very confused man.  The terminology he used is actually a pretty honest assessment.  The economy seems to be at a tipping point and could go either way.  He added that the Fed now sees reducing the Unemployment Rate as "somewhat slower" than previously expected.  He didn't say much about other things the Fed could do to stimulate the economy other than to say the Fed is prepared to take more policy actions "as needed."  On the other hand, he said the Fed has considered ways to reduce asset holdings.  In the Q&A, which comes later, I would imagine he will be asked what would have to happen for the Fed to take other actions and what might those be. 

Bernanke didn't say much about inflation and certainly didn't say anything about deflation.  He merely said the Fed expects subdued inflation over the next several years.  Odd how he thinks the economic outlook is "unusually uncertain" yet he seems certain about the inflation outlook for years to come. 

Stocks have dropped on this news.  Perhaps the unemployment assessment is being taken as a negative. The Dow is now down 70 points.  Bond traders apparently found something to like in this testimony.  The 2-year is .57%, the 5-year 1.66%, and the 10-year is up 11/32s to yield 2.91%.  The 30-year bond is up over a full point to yield 3.92%.  If you believe Bernanke's inflation forecast, you have to love long bond yields - despite what looks like a low yield.

I'll be back with any Q&A headlines.

Update 9:30 a.m.:

Stocks have traded very quietly before Bernanke's testimony.  The Dow has been contained to a range of -30 to +34.  The Dow is currently up 12 points. Volume is light.  I'm not sure what the stock market wants to hear from Bernanke or what it doesn't want to hear.  I can't see that what he says will make a significant difference, but there certainly seems to be a lot of interest in what he has to say.  He isn't going to bash the economic outlook to bits, but he is unlikely to discount the current weakness.  He can't really be specific about any potential FOMC moves either.  But, we'll wait along with everyone else for the headlines.  Usually, all you need to know is the headlines from the prepared text.  This time could be different.  He might face some pointed questions from the Senators.

The 2-year is .58%, the 5-year 1.68%, and the 10-year is now higher by only 2/32s to yield 2.94%. 
 
Update 7:10 a.m.:

The Dow opened higher by 34 points as indicated by futures trading, but there was no momentum despite positive earnings news.  The Dow is now down 5 points in extremely quiet trading.  There is more talk about Bernanke's upcoming testimony than earnings.

Bond prices have flipped to positive.  The 2-year is .58%, the 5-year 1.67%, and the 10-year is now higher by 5/32s to yield 2.93%.  The 30-year bond is higher by 13/32s to yield 3.96%.

Banks aren't lending seems to be a common complaint and reason for sluggish economic growth.  That is partially true.  Banks aren't ramping up lending to consumers - but consumers don't want to borrow.  Consumers are in a paydown mode.  Banks aren't lending to business - banks don't want to risk adding to loan losses when they know they have more to come.  Big businesses are cash rich and can borrow cheaply in the capital markets.  But banks are lending and lending big to one customer - the U.S. government.  In April of 2009, bank holdings of U.S. treasuries were $486 billion.  Last week the Federal Reserve reported band holdings of governments at $777 billion - almost a $300 billion increase.  More impressive was bank holdings of mortgage backed securities issued by Fannie and Freddie.  In April 2009 banks held $286 billion in MBS.  Today that number is $1.12 trillion.  In total, banks have increased lending by over $1.1 trillion but it's to the government.  (Fannie and Freddie are both government entities in reality if not technically)  Banks are borrowing near zero thanks to the Federal Reserve, and lending to the government at much higher rates.  Banks don't get hit with big  capital charges and have no risk other than interest rate risk.  Sweet. 

Morning Comment:

The focus today is on Ben Bernanke’s Senate testimony on the economy.  While he is unlikely to say anything startling, there is a lot of interest in how he views the recent weakness in economic numbers and inflation.  The markets will be listening intently to hear if he is leaning more toward a dis-inflation or deflation scenario than in the past.  If so, he may address additional measures the Fed could take to pump up the economy and reduce the risk of deflation.  Bernanke’s testimony today is the semi-annual report on the economy to Congress.  It has been a long time since this semi-annual testimony has generated this much interest.  His printed statement will be released at 11:00 a.m. PDT.

In the meantime, it’s Earnings Central for the stock market.  Apple reported the usual huge earnings for the quarter, which of course “beat expectations.”  That stock will be up big at the opening.  Other companies such as Coke, Wells Fargo, and Morgan Stanley also reported earnings that met or exceeded expectations, although there were no huge surprises to the upside.  Apparently it takes more than an Apple a day to generate a huge rally for all stocks.  When Apple reported last night, the CNBC pundits felt this would be the spark to ignite a big earnings rally.  Instead, Dow futures are higher by about 30 points in pre-opening trading.  It’s early though.

Bond prices have opened unchanged to start the day.  The 2-year is .58%, the 5-year 1.69%, and the 10-year is unchanged at 2.95%.  There are no economic statistics today. 

I’ll be back with updates.  I’m sure we’ll see some action in the early hours of trading, but the world awaits Mr. Bernanke. 

Dwight Johnston