Fed Stays the Same!
At yesterday’s FOMC meeting, the Fed didn’t move on interest rates and maintained the “extended period” language that we have been hearing for, well, an extended period. So how long exactly is “an extended period”? Well unfortunately for the US, this could be a long time. Take a look at Japan, who did not move on interest rates (as expected) either, and have been experiencing deflation for well over 10 YEARS!
Economists and government people in the US claim it “can’t happen to us”, but as every day passes, the similarities become more frightening. A look at today’s PPI figure confirms that prices are declining and not advancing, giving credence to the position that deflation is winning in the inflation/deflation debate.
In the meantime, employment is picking up in the UK, which is positive for their economy going into elections. The threat of a “hung Parliament” has some investors nervous that there won’t be enough political conviction to tackle the UK debt crisis. Time will tell.
Today we are seeing an increase in risk appetite, as both the US and Japan held steady with interest rates. Commodities and stocks are higher this morning, with oil above 82.
In currencies:
Aussie (AUD): The Aussie is higher on risk-taking and commodity prices today; especially after Japan help steady on rates and is going to expand quantitative easing. The Aussie is fast approaching its 2010 highs.
Kiwi (NZD): Same deal today for the Kiwi, though it is faring slightly better than the Aussie as the market is betting that rate hikes will be slowing in Australia and potentially picking up in New Zealand. Carry trades are on today, with the yen as the primary funding currency.
Loonie (CAD): In classic risk-taking fashion, the Loonie is the third best performer as oil prices are above 82 and the market has an appetite for risk. The Loonie is fast approaching parity with USD and could get there with Friday’s retail sales figures and CPI.
Euro (EUR): The Euro is mixed this morning as doubts over how the PIIGS countries are going to control their budget deficits. This is coming from the EU which is basically saying that the measures being taken are based on “favorable” economic forecasts and therefore may not be realistic.
Pound (GBP): The Pound is higher today as Jobless Claims fell at the fastest pace in over 10 years. The expectation was that claims would increase by 6K; the reality was that they shrank by 32K. This is positive for the UK economy, as they have taken on a record deficit to stoke economic recovery. Whether or not this is enough to leave the majority in power in the upcoming elections remains to be seen.
Dollar (USD): Well it looks like Bernanke can breathe easy as today’s PPI figure dropped .6% vs. an expectation of a decline of .2%, the largest drop in 7 months. The Fed maintained the extended period language and as I mentioned above it could be a VERY long time before the economy expands to the point where higher rates may be needed. Of course that doesn’t mean that food and energy prices won’t go higher; which would affect everyone. This is starting to look more and more like stagflation as we are not seeing the rebound in the economy and job creation that one would think we should see after enacting the ginormous “stimulus” package. Just wait until the higher tax receipts expected to pay for this don’t come in. Voila! Hello Japan 2.0.
Yen (JPY): Speaking of Japan and stagflation, the Bank of Japan kept interest rates at .1% as expected, and caved in to the pressure from the government and doubled a lending program to $220 Billion to try to combat deflation. Good luck with that one. Psst Bernanke! Here’s a road map of what NOT to do!
As you can see, the money faucet just keeps flowing with both US and Japanese Interest rates at record lows. This means that all kinds of other assets (commodities and stocks particularly) are going to benefit and go higher. However, just because the money supply is expanded, does not mean that the velocity with which it circulates is increasing. What does that mean?
It means that while money is being created, it is not being lent out to ordinary folks who could use it. Frankly, if I were a bank, I wouldn’t be lending money for home purchases either, as nearly everyone is a credit risk in this economy. And so we trudge forward, with no end to this mess in sight. Keep an eye on the US-China currency story, as this could have a major impact on the world economy.
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