Strip the financial markets down to their bare essentials, and the most important factor determining performance is the cost of capital. In the coming week, the world's arbiters of the price of money will take center stage in a variety of venues.

Federal Reserve

Chairman Ben Bernanke, the drum major of this week's parade of policymakers, gives his semiannual Congressional testimony on Wednesday and Thursday. Following this past Friday's trifecta of Fedspeak -- featuring hawkish comments from St. Louis Fed President William Poole, Dallas Fed President Richard "Eighth Inning" Fisher and Cleveland Fed President Sandra Pianalto -- it's highly unlikely Bernanke will be bringing the financial markets roses and chocolates on Valentine's Day.

"In the upcoming testimony, Bernanke can be expected to provide an upbeat assessment of economic conditions," writes Mickey Levy, chief economist at Bank of America. The Fed chairman will focus on "contained" business inventories and "healthy aggregate demand" outside of residential housing, which itself is "adjusting efficiently" and working down "undesired inventories," Levy predicts.

Regarding inflation, "Bernanke will express the Fed's concerns,"despite a recent "favorable drift down" in core readings, Levy continues. "Primarily, core inflation remains above the Fed's long-run objective; the economy is operating close to productivity capacity and there are selective signs of labor market tightness, which is pushing up wages."

If Bernanke is indeed upbeat about the economy and fretting about inflation, the bulls could be in for another rough week. A more optimistic view says such expectations were starting to be reflected in Friday's selloff in stocks and Treasuries, and the damage may therefore be limited by the time Bernanke steps into the spotlight.

Bernanke is not the only unelected bureaucrat slated to make public pronouncements with the potential to roil financial markets in the coming week. The G7 confab in Essen, Germany got underway Friday amid much consternation about recent weakness in the yen, which has recently hit multiyear lows vs. other major currencies. The resulting price competitiveness of Japanese exports in the global marketplace has caused much handwringing in the rest of the industrialized world.

Ahead of the G7 meeting, House Democrats sent a letter to Treasury Secretary Hank Paulson requesting he admonish Japanese officials to "reverse their weak yen policy,"

The Financial Times


The Bush administration seems much more focused on the Chinese yuan, but many European politicians would no doubt support the Democrats' suggested scolding of the Japanese, as the yen is approaching all-time low levels vs. the euro.

At the G7 meeting late Friday, French Finance Minister Thierry Breton told reporters the G7's communiqué will most likely not single out the yen. "Don't expect a specific paragraph on a specific currency,"


reports him saying.

However, Japanese policymakers may receive private pressure at the G7 meeting, which could result in a more hawkish statement from the Bank of Japan, or an actual rate hike, at its next policy meeting on Feb. 19-20. While that's a story for the following week, Thursday's report on Japan's fourth-quarter GDP could sway expectations for forthcoming BOJ policy.

Why does this matter to U.S. investors? One, it's a global financial marketplace. Two, a great deal of the so-called liquidity surge buoying financial markets worldwide has been emanating out of Japan; rock-bottom borrowing costs are facilitating the so-called carry trade, the borrowing of yen to reinvest in higher-yield assets, as discussed in


Real Story


Three, the wild gyrations in financial markets last spring began not, as many purport, with the Fed's failure to pause at it May 10 meeting. Rather, it was the Bank of Japan's efforts to remove liquidity and prepare for the end of the zero rate policy in the days prior to that Fed meeting that really started the ball rolling downhill for asset prices.

On the flipside, with G7 members apparently battling to have the


currency, gold prices moved to

multimonth highs above $670 per ounce Friday. Beggar thy neighbor, indeed.

Of Stocks and Sectors

If Mickey Levy is right, Ben Bernanke will accentuate the positives about housing in his testimony. Ahead of that auspicious event, the market will look to Tuesday's earnings report from

K.B. Homes

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for more insight on the state of the sector, while Friday brings housing starts data.

The "housing bottom" crowd was undermined this past week by lackluster results and guidance from

Toll Brothers

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, as well as the subprime stench wafting from

New Century Financial

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HSBC Holdings

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. (Given comments by his predecessor, it is unlikely Chairman Bernanke will be overly concerned about the subprime market, my colleague

Liz Rappaport reports.)

The earnings calendar slows considerably in the coming week but does feature results from

Yum! Brands

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Applied Materials

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Transocean Offshore

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Jones Apparel Group


is scheduled to report on Wednesday, a day after January retail sales data are released. (Other economic reports include the trade balance on Tuesday, industrial production/capacity utilization on Thursday and PPI on Friday.)

Last week's stronger-than-expected same-store sales data got traders feeling more upbeat about retail stocks, and consumer spending generally. The cold snap in much of the country in late January helped retailers sell winter gear, albeit at a discount (although not as steep as previously expected).

However, overall sales slowed considerably in the second half of the month because "exactly at the same time temperatures went into arctic freeze we got the spring merchandise in," Dana Telsey, CEO and chief research analyst at Telsey Advisory Group said Friday in an

interview on TV. "It felt chilly to buy sleeveless clothing."

Telsey believes same-store sales in the first half of January could be as much as eight basis points higher vs. the second. That, in turn, could mean there's downside risk to the forecast for retail sales growth of 0.3%, already down considerably from December's robust 0.9%.

Nonetheless, Telsey said "easier comps are coming in the month of February" and expressed a bullish view of

J. Crew

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Best Buy

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Blue Nile



Aaron L. Task is editor at large of In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

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