Experts Talk Bernanke, Stocks, China's Currency Moves

Most see a bottom for this recession, with an uptick coming next year—barring the dreaded double dip

By BusinessWeek staff

Ah, late July. Time to put hamburgers, hot dogs, and the Federal Reserve chairman on the grill. Fed chief Ben Bernanke will deliver his semiannual monetary policy report to a House panel on July 21 and a Senate committee on July 22. After delivering his prepared testimony, the Fed chief will no doubt be subjected to some pointed questions from lawmakers on the pace of economic recovery, the prospects for a renewal of inflation, the Fed's "exit strategy" from its near-zero interest rate policy, its expanded role in regulating the financial system, and many other topics.

Here, BusinessWeek collects comments from Wall Street economists and strategists on Bernanke's congressional appearances and other key topics on July 20:

Michael Wallace, Action Economics

Fed Chairman Bernanke could start to articulate the exit strategy with his semiannual testimony to the House Financial Services Committee on Tuesday, with a reprise to the Senate Banking Committee on Wednesday. We and many other Fed watchers believe indications that policymakers will remove liquidity in a timely manner in order to limit the potential inflationary pressures resulting from excess liquidity in the system would do more to keep down interest rates than any other strategy.

Look for Bernanke to strike a careful balance between "green shoots" and "yellow weeds" on the recovery, while keeping options open on emergency liquidity measures and retaining his commitment to the "extended period" policy rhetoric for now.

Bernanke is likely to get a lot of grief from Congress over the new economic and inflation forecasts contained in the FOMC minutes released last week, especially the projection of an unemployment rate above 10%.

Beth Ann Bovino, Standard & Poor's

The Conference Board's index of U.S. leading indicators rose 0.7% in June, to 100.9, after rising 1.3% in May. The June reading is higher than the 0.5% increase expected by markets. It was the third consecutive monthly gain. Seven of the 10 indicators posted gains, paced by the yield curve and building permits. The six-month diffusion index held at 50.0, adding to other signs that the recession is starting to bottom out.

David Kostin, Goldman Sachs

We are raising our yearend 2009 Standard & Poor's 500-stock price target to 1060, 13% above the current level. After trading in a 10% band for the past three months…sequential improvement in ex-Financials EPS, stabilization in profit margins, and higher forward EPS guidance all point to a rising market through 2009. [We are also] raising S&P 500 EPS [estimates]: $52 in 2009, $75 in 2010. Our new operating EPS estimates of $52 (from $40) and $75 (from $63) reflect year-over-year growth of 5% in 2009 and 45% in 2010. Measured on a pre-provision and pre-write-down basis, our estimates are $69 and $81.

Lower Financials losses largely explain our higher EPS forecast. The S&P 500 trades at 12.5 times our 2010 operating and 11.6 times our pre-provision EPS [estimates].

The U.S. economy is the key risk to our forecast. Although our current economic outlook is for below-trend growth through 2010, the risk of a "double-dip" recession remains significant.

Win Thin, Brown Brothers Harriman

China has signaled that the nominal yuan exchange rate is likely to remain steady for this year, as the policy of gradual appreciation [vs. the U.S. dollar] has been put on hold since mid-2008. [Currency futures] are pricing in 1% nominal appreciation vs. the dollar [over the next 12 months], but we look for modest appreciation to resume in the first half of 2010 at a faster pace than this if the global economy heals as we expect next year.

We downplay any moves to globalize the yuan or make it an invoicing currency for regional trade. The lack of convertibility and the small size of the bond and foreign exchange markets in China will prevent any widespread globalization of the yuan for the coming decades. There is a chance that the yuan and Hong Kong dollar could become somehow unified, but that, too, would most likely be decades away.

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