Rumors were floating around today about the FED removing the “extended period ” language from the next FOMC meeting. A well known and “respected” think tank was purportedly saying that they had the inside scoop on the FED.We find this to be nonsense! For more years than we care to recall, there have always been those in the know. Sometimes they have it right and sometimes it is so off base that it’s laughable but they are able to capture the headlines. We believe that this news/rumor is of little signifigance for the mere removal of the “extended period” language is of little consequence. The FED will need to act to justify any market movement and as we have stated before, if the equity and bond market cannot withstand a rise of short rates to at least 2%, it is built on a foundation of sand. Some analysts are moving GDP estimates for the first quarter up to 4%, so a Fed Funds rate of 1% would still be well below two strong quarters of growth. The FED will also have to be as aggressive in raising rates as they were in lowering rates or the FED will be called to task for assymetrical policy, and the bond vigilantes will punish the U.S. debt markets for its laxity.
Interestingly, the DOLLAR failed to rally even in the face of this rumor, although the GOLD came under pressure for a second day. We cautioned that the GOLD ought to sell off following the GREEK news from the weekend, but this small correction after last week’s strong rally has not shaken the longs yet. The market has yet to tell us that they fear any FED action and the tweaking of the FOMC release without any substantive action will not do the job.
Last night, the Monetary Authority of Singapore revalued the SING DOLLAR by 1%,which led to a rally in all things Asian except the KIWI, which had weak retail sales and credit expansion numbers. The growth story in Asia is real. The only question is will it lead the world economy out of its lethargy?
Preceding the SINGAPORE news was word from the Obama administration that it viewed the CHINESE currency as a domestic issue for Beijing. We couldn’t agree more with that assessment if they really believe that they should cool the political machinations and back off from the incendiary rhetoric and threats of trade sanctions. Rumors will float tomorrow that the SINGAPORE reval is just a precursor of what the Chinese plan on doing. If Asian growth and Chinese reval are real, we will turn our eyes to the commodity markets for that is where the real action will take place, especially if the developed western nations are slow to raise rates to any meaningful level. The need for growth in the developed world is the most important goal of economic policy. Job creation is of the utmost importance and that will keep the central banks in a very defensive mode. Donald Kohn spelled it out last week: The existence of negative output gaps keeps the inflation bogeyman away and that is the preeminent mindset of economic policy makers. And that is fact and not rumor.
April 14, 2010 at 7:13 pm |
Yra-
Good stuff. What is your reasoning to focus on the CRB if China does decide to revalue? Does the reval promote dollar weakness and allow the East to accumulate goods cheaper with the higher exchange rate? I assume by the West staying on hold longer it perpetuates fundamental case against the US Dollar. Thanks again.
April 15, 2010 at 10:10 am |
exactly–a bigger china reval will denote that china will be acquiring raw materials in a large way—recent story on energy sector purchases by chinese entities—synfuels the most recent one but many more to come.The bernanke speech yesterday shows the FED will be easier then some think for longer time and the European situation does not get them to move so rates low and the growth story on the peripherals is getting more attention—so as usual in capitalism prices are set at the margin
April 18, 2010 at 4:29 am |
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