Wednesday was a busy day for economic news resulting in bullish trading. Economic reports were heavier today, but these took a back seat to Fed Chairman Bernanke's testimony before the Senate Banking Committee. Data on retail sales and business inventories were also released, along with weekly data on mortgage applications and petroleum supplies.

There were fears that Mr. Bernanke would provide a hawkish testimony this morning. This was due to comments from other Fed leaders this weak that were on the hawkish side. However, the Fed Chairman provided comments that sent stocks sharply higher. Most notably was Mr. Bernanke's comment that interest rates are at a comfortable level. He did note that further hikes could be needed if inflation worsens, but that incoming data has been bullish for the economy even while the inflation outlook eases.

The Fed tends to put more focus on price stability and rightfully so. Nonetheless, Mr. Bernanke believes the housing market is bottoming though it is too early to make this a certainty and that a tight labor market would lead to further inflation pressures. Of course, this will depend on strong productivity growth going forward. Overall, the feeling is that the Fed sees this as a "Goldilocks" economy, where it is not too hot, nor too cold, but just right.

Retail sales were mixed in January with the headline figure showing a flat reading. This was a disappointment given expectations for 0.3 percent growth. However, retail sales less autos rose an as expected 0.3 percent. Sales less autos and gasoline were up 0.5 percent in January after a 1.0 percent rise in December. Year on year, sales are up 2.3 percent overall, down from 5.7 percent last month. Year on year sales less autos and gasoline are up 4.3 percent, off from a 6.3 percent gain in December. Overall, this news put some bearish pressure on retail stocks with the S&P Retail Index ($RLX) under performing the broader market, rising just 0.38 percent.

Business inventories were flat in December, which was in line with estimates. Business sales rose 1.4 percent, which pushed the stock-to-sales ratio down 2 tenths to 1.28. Though retail inventories rose 0.3 percent, there has been data in January pointing to a reduction in inventories. This data hasn't had much of an impact on stocks given it is December data and much of the data found in the report can be found in more recent releases.

Mortgage applications fell slightly for the week ending Feb. 9 to a level of 400.7. This was a decline of 4 points from the prior week. Mortgage rates were virtually flat during the week at 6.24 percent. Though applications have been easing so far in 2007, this doesn't necessarily mean the housing sector is worsening. Tomorrow traders will get the housing market index to digest, which will provide a better view of the housing sector.

Oil prices have been fluctuating the past few weeks on varying news about supply and demand. On Wednesday, weekly inventory data showed crude stocks falling by 0.6 million barrels. However, this was below expectations and led to a decline in oil prices on the session. Distillates fell by 3.0 million barrels, but this too was not as bad as expected. Overall, crude prices fell 1.06 to close at $58.00. The $60 level continues to hold and bears got good news this week when the Saudi oil minister said further production cuts would not be needed by OPEC.

Tomorrow will be another busy day with Mr. Bernanke continuing is testimony on the hill and a slew of economic reports due out. Data on industrial production, import/export prices and the Empire State Mfg. Survey are all on tap, as well as the Philly Fed Survey and the housing market index.


Jody Osborne
Senior Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site