The US Consumer Price Index came out this morning showing a slight increase and not as high as the general expectation, though relatively tame. While this number is not that unexpected or significant, it shows that as of this moment, the greater economic force to combat in the US is deflation, and not inflation.
This all but closes the door on any US rate hikes until at least the beginning of Q3 this year, if they happen at all this year. Normally, I would expect to see some dollar weakness after a number like this, but the flavor of the day is risk-aversion.
Between the problems in the Euro Zone and the Consumer Confidence Numbers coming in a little worse than expected, traders are taking a bit off the table going into the weekend. Because the US stock market is closed on Monday for the observance of Martin Luther King Day, there is a heightened sense of risk for the long weekend.
So we’re seeing US dollar strength, Euro (EUR) and the commodity currencies (Aussie, Kiwi, Loonie) weakness. Also to note is that the stock markets are down roughly 1% on the day, as are oil and gold.
Another factor weighing on the stock market is the earnings report from JP Morgan. While they did report higher overall profits, investors were concerned with their mortgage and credit card loan losses. Should this problem expand to the other banks and become unmanageable, this could derail economic recovery.
However, should we make it through the weekend “unscathed”, namely no systemic breakdowns, then I expect we will see US dollar weakness return as risk-taking returns to the market.
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