Thursday, February 17, 2011

Falling On Deaf Ears!

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By Mike Conlon | February 17, 2011

At least that’s what appears to be going on here in the US, as yesterday’s PPI figures showed rising prices ahead of today’s all-important CPI report. Yet the minutes from the FOMC meeting told an entirely different story.

Bernanke and the Fed remain committed to the idea that either rising inflation is unimportant or that it is not taking place at all! So this is either a case of complete incompetence or intellectual dishonesty. Either way, the picture is not pretty.

Meanwhile, politicians in Washington are arguing over the proposed government budget yet no one is willing to tackle the major problems that affect the deficit so extend and pretend continues. Perhaps Bernanke and the Fed are aware of this so they continue to enable bad behavior rather than forcing politicians to make hard choices.

Today’s CPI report will show where inflation is “officially”, but I expect some sort of major disconnect that will leave the market scratching its head. Much like this month’s ubiquitous Non-Farm Payrolls report, I expect this figure to be an outlier.

I’ve been harping on the UK as of late and apparently someone over there has taken notice. Well not exactly, but the lone dissenter at the BOE came out and said that higher rates and a stronger Pound might actually be GOOD for the UK economy. Thus the Pound is slightly higher. Maybe Andrew Sentence is a closet reader of forex trading blog!

Lastly, it looks like news out of the Middle East is showing that unrest is spreading to various regimes, and a story yesterday about Iranian warships sent oil higher. There is still a good deal of event risk coming from that region of the world, and I’m not certain that the global financial markets are respecting the potential impact.

So markets are mostly flat this morning, waiting on the US CPI data which is expected to show inflation of 1.6%.

In the forex market:

Aussie (AUD): The Aussie is slightly higher this morning after stocks were higher in the Pac Rim markets. There is a slight bias toward risk-taking ahead of today’s CPI data.

Kiwi (NZD): The Kiwi is also higher slightly higher even though consumer confidence figures came in lower overnight. In addition, PPI inputs were higher but PPI outputs were lower which could suggest declining business margins. Industrial production figures were higher from last month. (Click chart to enlarge)


Loonie (CAD): The Loonie is trading mostly higher ahead of Canada’s CPI data which is due out tomorrow.

Euro (EUR): There hasn’t been a lot of news emanating from the euro zone lately which always makes me a bit cautious. The Euro is mostly lower as the current account deficit has increased from the previous reading. (Click chart to enlarge)


Pound (GBP): The Pound is mostly higher after comments from BOE policy-maker Sentence suggested a stronger Pound and higher rates was good for the UK economy. This is not a new stance, however, as he has been voting for rate hikes for some time.

Dollar (USD): I just had to wait this morning for the CPI report to see if what I suspected was right. Sure enough, the number is suspect. The headline came in exactly as expected, showing 1.6% headline inflation, yet the monthly figure increased by .4% vs. expectations of a .3% gain. It is now getting to the point where you can’t even rely on the data so it’s becoming almost a non-issue. Initial jobless claims came in at 410K, moving back to the “fours” after last week’s dip into the “threes”.

Yen (JPY): The Yen is showing a bit of strength this morning after a recent bout of weakness as safe haven demand has returned after yesterday’s FOMC report showed that the Fed isn’t going to change its stance any time soon.

The markets have had a muted response to the CPI data and its almost as if no one cares anymore. Jobless claims here in the US are also a non-issue, unless of course you are one of the 400+K people being laid off each week.

Government reports show that inflation is low, yet if you do anything today you know that is not the case. Trips to the grocery store or the gas station confirm what you already know. But it’s almost as if there is a magic vacuum that sucks those figures right out of the official reports so the Fed can continue to justify its easy money policy.

Confidence in government is an un-measurable metric in the economy, and my guess is that it is near an all-time low. The market reaction to today’s data confirms that. So I expect to see some range-bound action today.

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