Economic Insights

Economic Insights   

Federal Reserve Chairman Ben Bernanke cooks the same old dishes again

If basketball fans are waiting outside the Staple Centre to meet their hero Kobe Bryant to appear, and as long as they hear the sound of ball bouncing on the floor, they would expect Kobe to be training in the stadium. The fans would be excited and keep shouting “Kobe, Kobe, Kobe!”; it always happens. However, they might see some kids training in the stadium at the end of the day instead of Kobe who is preparing his trip to London with his “Dream 10″ team. The fans do not know what exactly is going on.

Same theory applies here. As long as some traders see the economic calendar and hear the terms such as “Federal Open Market Committee (FOMC)”, “testimony”, “Federal Reserve (Fed) member’s speech”, etc. they will strongly expect “Kobe” to appear on the stage; however, big hope usually ends with big disappointment because reality usually does not follow humans will.

In Bernanke’s semi-annual testimony yesterday, he repeated a lot of details from the last FOMC meeting, which continues carrying the ultra-dovish tone but without a clear message of another round of bond purchasing. He emphasised two major risks:

1. European crisis
2. US fiscal cliff

The second risk seems like a bigger concern because the “fiscal cliff” could directly trigger the US recession. The tax increase and spending cut are expected to be around USD560 billion for next year while the Gross Domestic Product (GDP) could be affected by 4%. The International Monetary Fund (IMF) forecasts US growth at 2% next year based on the fiscal consolidation of 1.5%. If based on the IMF’s method, the US economy could contract 0.5% in 2013 if the fiscal cliff represented a 4% consolidation.

Regarding the contagion in the Euro Zone, there is not much the Fed can do. The European policymakers have been reaching a new consensus after the European Union (EU) Summit. But the obstacle is ample and the implementing risk is extremely high. However at this stage, the US borrowing cost has reached a historical low given the large funds have flowed into the country due to traders seeking for safer places for their portfolio.

The US Consumer Price Index (CPI) was unchanged last month, and it has a very little impact on the next FOMC meeting. The low inflation in June was mainly due to the gasoline price dropped.

Disclaimer The analysis we provide is based on the average estimate of price movements in one day. Does not guarantee what we deliver is actually a proper and correct. Everything that happens in the decisions you make on your trading transaction is to be Your responsibilities.

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