Gloomy housing sector data and continued layoffs led to a subdued Wall Street opening as investors played safe with their profits after a succession of session gains.

Investors were also reacting to a warning from [...]]]> US investors opt to take profits on release of disappointing data and as Bernanke warns that America must curb its budget deficit.

Gloomy housing sector data and continued layoffs led to a subdued Wall Street opening as investors played safe with their profits after a succession of session gains.

Investors were also reacting to a warning from Federal Reserve chairman Ben Bernanke that Congress and the Obama administration must start plotting a strategy to curb record-high US budget deficits.

Failing to do so could eventually erode investor confidence and endanger the economy’s prospects for long-term health, he said.

Testifying before the House Budget Committee, Mr Bernanle said: “Even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance.”

The White House estimates that the government will rack up an unprecedented $1.8 trillion budget deficit this year. That would be more than four times last year’s all-time high.

The Dow Jones industrial average was down 71.76points, or 0.82 per cent, lower at 8,669.11.

A survey by ADP, a payroll business, revealed that the US private sector shed 532,000 jobs in May – better than 545,000 in April but slightly higher than the 525,000 estimated.

The US Mortgage Bankers Association also said mortgage applications fell 16.1 per cent for the week ended May 29.

The CIPS/Markit purchasing managers’ monthly survey on the services sector did little to help the FTSE 100, which continued its downward spiral, slumping by 108.8 points, or 2.43 per cent, by mid-afternoon.

Heavyweight blue chips were to blame for part of the fall as they began to trade ex dividend.

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He again highlighted that the US economy still faces further contraction, however he intimated that the US government would not move to nationalize US [...]]]> Following dreadful US consumer confidence data earlier in the day the Dow posted a 2% rise, this after Bernanke testified to the Senate on the health of the US economy.

He again highlighted that the US economy still faces further contraction, however he intimated that the US government would not move to nationalize US banks as this would lose value already built into banks. On the back of this there was an expected jump in bank stocks and this was the main driver for the gain in the Dow.

President Obama addressed congress for the first time yesterday and again stressed the severity of the economic crisis; he vowed to put a stop to wasteful spending and vowed that banks and bankers taking public funds would be held accountable.

He also reaffirmed his plan to cut the spiraling deficit which is becoming a huge problem for the US economy and will weigh on the dollar if not significantly reduced. Overall his address offered hope and determination for recovery as he vowed “we will build, we will recover”, lets hope so!

Yesterday in Europe we saw the German Ifo survey come more or less in line with expectations, today saw GDP come in exactly as expected at -2.1%. In the UK 4th quarter GDP was actually a touch better than expected showing a contraction of 1.5%, however taken in context this brings the year on year to -1.9% which is an 18 year low and reinforces the sharpness of the slowdown.

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However, with financial markets remaining [...]]]> The Labor Department reported 334,000 new claims for the week ending August 25, while economists had predicted 322,000 new claims. That was the most new claims since 341,000 in the week ending April 14 and prompted concerns that troubles in the US housing sector are spreading to the labour market.

However, with financial markets remaining volatile the dollar’s fall was relatively low, with investors’ attention focused on the weak opening on Wall Street. In the current environment movements in other markets, rather than data are what’s driving interest rate worries.

Meanwhile release of revised US second quarter GDP figures – which revised the annual growth up to 4.0 % from the previous estimate of 3.4 % had negligible impact, being largely in line with analyst expectations.

Now attention will turn to today’s speech by Fed chairman Ben Bernanke at Jackson Hole, with market participants looking for hints on whether the cut will materialise.

Bernanke is likely to leave many in the market disappointed and play down the prospect of a cut, emphasising that the Fed will only lower rates as the economy slows, and not because of what’s happening in the markets.

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However, the Federal Reserve chairman said the risks to both inflation and growth had increased in the past few weeks and the US central bank would be flexible [...]]]> Ben Bernanke challenged market expectations of early US interest rate cuts on Wednesday, saying he remained comfortable with rates on hold in spite of recent adverse economic data.

However, the Federal Reserve chairman said the risks to both inflation and growth had increased in the past few weeks and the US central bank would be flexible in responding to future economic news.

Mr Bernanke told the joint economic committee of Congress: “To date the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation.”

The Fed’s recent policy statement – which baffled markets when it was released a week ago – was not intended to signal that the Fed now had a neutral policy stance, he said.

“I want to emphasise that we have not shifted away from an inflation bias,” he said.

Mr Bernanke said changes to the Fed statement were intended to give it greater scope to respond quickly if the outlook for either growth or inflation deteriorated significantly. “We are looking for a bit more flexibility given the uncertainty we face.”

Mr Bernanke also brushed aside comments by Alan Greenspan, his predecessor, that the expansion looked to be ageing, raising the possibility of a recession. Expansions did not “die of old age”, he said.

Mr Bernanke played down the threat from the subprime mortgage market and highlighted a new risk to growth from weak business investment. His comments came as the Department of Commerce released figures showing that durable goods orders bounced back weakly in February after a plunge in January.

“The possibility that the recent weakness in business spending will persist is an additional downside risk,” he said.

The Fed chairman hinted that the weakness had been a surprise: “The magnitude of the slowdown has been somewhat greater than would be expected given the normal evolution of the business cycle.”

But he added: “Despite the recent weak readings, we expect business investment in equipment and software to grow at a moderate pace this year.”

He was less alarmed than many investors by the distress in the subprime mortgage market.

“At this juncture…the impact on the broader economy and financial markets of the problems in the subprime market seem likely to be contained,” he said.

He recognised the risk that the housing market correction “could turn out to be more severe than we currently expect, perhaps exacerbated by problems in the subprime sector”. Overall, he indicated that the US central bank remained relatively upbeat about prospects for growth.

He said consumer spending “has continued to be well maintained so far this year” and said consumption “should continue to support the economic expansion in the coming quarters”.

Mr Bernanke added “the economy appears likely to continue to expand at a moderate pace over the coming quarters”.

He reiterated a series of reasons for the Fed to remain concerned about inflation. “The high level of resource utilisation remains an important upside risk to continued progress on reducing inflation,” Mr Bernanke said.

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Yet real concerns about the US economy still remain. We saw the largest percentage drop in new home sales in 13 years. The significant aspect [...]]]> Federal Reserve Chairman Ben Bernanke confirmed his positive outlook on economic growth and indicated that the latest move in stock prices will not alter the Fed’s plans for monetary policy.

Yet real concerns about the US economy still remain. We saw the largest percentage drop in new home sales in 13 years. The significant aspect of this is that the supply of new home sales increased which suggest the worst is yet to come. The Chicargo PMI was also down from an anticipated 50.0 to 47.9.

After yesterday’s drop in world markets leaders came out to assure investors and try to calm the massive sell off. Starting with the Chinese government, officials at the Ministry of Finance reassured international investors that they are not planning to take some heat off the economy by enacting a capital gains tax.

Investors felt that tighter restrictions on foreign investment would inhibit potential growth. In the US, members of the NYSE attributed the collapse in the Dow to a computer glitch and not necessarily mass bearish sentiment.

German Unemployment rate dropped from 9.5% to 9.3% and consumer confidence improved in the Eurozone region despite the prospects for another interest rate hike and the increase to Germany’s Value Added Tax.

The UK’s Nationwide Building Society reported 0.7% rise in house prices in the month of February. The market was looking at a 0.5% rise. Bank of England Deputy Governor Lomax warned today that inflation could fall sharply in the months ahead and take the rate below the central bank’s target by the end of the year. Consumer confidence did not improve along with it as the GfK report dropped from -7 to -8.

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By the week’s end, futures markets [...]]]> US government bond prices hit one-month highs on Friday as investors took heart after Ben Bernanke, chairman of the Federal Reserve, said inflation is easing. Weaker than expected data encouraged the bond bulls who felt Mr Bernanke’s comments heralded interest rate cuts in the face of slowing US economic growth.

By the week’s end, futures markets had fully priced in a quarter point cut in interest rates by the end of the year, up from a two-thirds chance at the beginning of the week.

Testifying before Congress, Mr Bernanke offered a balanced assessment that contrasted with that of other recent Fed members who had emphasised the risks of further rate increases.

While inflation remained the primary concern, he indicated that “the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing of core inflation”.

However, investors focused on a perceived change of tone, as Mr Bernanke listed reasons to expect inflation would slow, including falling energy prices and the potential for accelerating incomes to be offset by higher productivity or lower corporate profit margins.

Investor concerns about the housing market were fuelled as starts data fell 14.3 per cent in January to a 10-year low.

US producer prices were also released, shrinking slightly more than expected in January, as energy prices declined sharply. On Thursday, a weak reading of business conditions in the mid-Atlantic region followed reports showing a surprise fall in industrial output and a surge in jobless claims.

The yield on the 10-year benchmark US Treasury was 1.6 basis points lower on the day at 4.694 per cent, down from 4.815 per cent on Monday. The two-year note yield was 0.9bp lower at 4.835 per cent, down from 4.929 per cent on the week.

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