Bracing for Bernanke

NEW YORK (CNNMoney.com) -- Questions about the strength of the economy and the direction of interest rates come to a head this week, when Federal Reserve Chairman Ben Bernanke hits Capitol Hill.

In a busy week for market watchers, reports are also due on the trade balance, retail sales, business inventories, housing and manufacturing, among other sectors of the economy. (see chart).

Confusion about the economy and Fed policy - as well as a rebound in oil prices - sent stocks lower last week, with investors reluctant to move much after the previous week's big rally.

This confusion has also limited the stock market advance year-to-date after a stellar run up in the second half of 2006.

As such, the main takeaway stock investors hope to get in the coming week is that the economy is slowing, but not too rapidly, and that inflation is easing a bit, said Ron Kiddoo, chief investment officer at Cozad Asset Management.

"If the reports continue to suggest surprisingly strong growth, that would be a short-term negative for the market, as it would add to views that the Fed will start raising rates soon," Kiddoo added.

Any comments from Bernanke that would seem to support such a possibility would be a setback for stocks as well.

In his semi-annual testimony before Congress - the Senate on Wednesday, the House of Representatives on Thursday - the Fed chief is expected to touch on a range of topics related to economic growth and pricing pressure, among other issues.

"The focus of the testimony will be on disseminating the Fed's forecast for GDP growth and core inflation, and what that forecast implies for interest rates," said Joshua Shapiro, chief economist at Maria Fiorini Ramirez Inc.

Bernanke is not likely to tell the stock market what it would like to hear - that inflation is moderating faster than the central bank anticipated and that the next change in short-term interest rates will be a cut.

But he's also unlikely to tell the market what it doesn't want to hear - that inflation is not moderating fast enough and that the central bank will have to raise rates soon.

What he is likely to do is put into context the recent hawkish commentary from a barrage of Fed officials - as well as the spate of surprisingly strong economic news.

"We're at a stage where the economy is growing at a reasonable pace and inflation is still higher than what the Fed wants," Shapiro said.

The testimony lets Bernanke "lay out a roadmap for investors," as to where the bankers see things going over the next six months.

In terms of other news on tap, Coca-Cola (Charts) and Applied Materials (Charts) highlight a modest weak for corporate earnings reports. (see chart).

However, with 75 percent of the S&P 500 having already reported December quarter results, the earnings picture is already pretty clear for many on Wall Street.

Earnings are currently on track to have risen 10.9 percent from a year ago, according to the latest Thomson Financial figures. That's a blended figure, combining reported and expected earnings. (Full story)

Investors will also be keeping an eye on the price of oil, with crude having bounced back up to around the $60 a barrel level Friday, a key psychological barrier.

However, crude would have to move even higher for it to really unsettle investors.

"If we stay in the $55 to $60 or so range, stocks will be fine," Kiddoo said, noting that the market reaction so far has been muted. "It's if we start to see it head back above $70 a barrel that you'll see a bigger market reaction."

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