Excerpt from our One Page Annotated Wall Street Journal Summary (receive it by email every morning by signing up here):
Bernanke Expects Slowing Economy To Tame Inflation and FOREIGN EXCHANGE: Dollar Slides Along With Expectation of Rate Increase and Bernanke Sends Stocks Skyward
Summary: The DJIA soared 212 points yesterday after Fed Chairman Ben Bernanke testified to the Senate Banking Committe that the economy would slow this year and next to its long term potential growth rate, limiting inflation. While acknowleging that inflation is too high, he predicted that slowing growth and stable energy prices would lead to lower inflation, without commenting on the Fed's interest rate policy. With the release of data at 8.30 am yesterday showing that the core consumer price index rose by 0.3% in June, higher than the Wall Street consensus of 0.2%, futures markets raised the probability of an interest rate hike from 65% to 90%. But with Mr Bernanke's comments later during the day, they fell back to 65%, stock prices rose, long term bond yields fell to 5.06% from 5.14%, and inflation protected bonds implied no higher future inflation. The dollar fell sharply, losing over a cent against the Euro and pound sterling and declining by half a yen. Stocks were helped by a fall in crude oil futures for the third consecutive day. However, the Commerce Department released data showing that housing starts fell 5.3% month-over-month in June and building permits fell 4.3%, worse than economists expected. Persistently rising rents are contributing to higher inflation via "imputed rent" for homeowners: the "shelter" constituent of inflation rose by 0.4% in June.
Comment on related stocks/ETFs: The lousy housing starts data was overwhelmed by the market reaction to Mr Bernanke's comments on inflation. Jeffrey Saut's assertion yesterday that the housing market is worse than people realize was correct.