Stealth Inflation!

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By Mike Conlon | April 6, 2011

Now that the CPI reports have come and gone, it is apparent to market watchers that there is indeed stealth inflation taking place. Aside from Bernanke turning a blind eye to it, the markets are telling us that indeed it exists.

Look no further than the commodities markets, which absent the major headlines, continue to climb on a daily basis. The gold market, for example, is at an all-time high having reached above $1460/oz and oil is fast approaching $110/barell. Not only does this tell us that the expectations for inflation are heightened, but you can also see these commodities pick up a bit of a safe-haven bid as the Japanese yen appears to have lost that safe-haven dynamic.

This has lead many Central banks around the globe to conclude that higher rates are in their best interests, as China raised rates for the fourth time in six months just yesterday, and the ECB appears ready to begin a tightening cycle tomorrow.

The BOE, on the other hand, is not expected to raise rates despite their willful neglect of inflation, though improving economic metrics can provide more confidence that the economy is stabilizing. The problem is that for everyday of good economic data reported, the next day of data is seemingly negative.

Later tonight, the Bank of Japan will have their rate decision, and the market is expecting additional stimulus to help in the crisis they are experiencing form the earthquakes and tsunami.

Nevertheless, stocks are higher to start the day as they are the only game in town for the retail investor thanks to the Fed’s easy money.

In the forex market:

Aussie (AUD): The Aussie is mostly higher on risk appetite as its correlation to gold prices is being exploited, despite having home loans decrease more than expected.

Kiwi (NZD): The Kiwi is posting big gains this morning a day after the Australian rate decision which now has money flows shifting to NZ. The temporary hit they took due to their earthquake is behind then and priced in so now the market appears to be looking forward to the inevitable GDP growth that will accompany the rebuilding process. (Click chart to enlarge)

Loonie (CAD): The Loonie is mostly higher and continues to make new yearly highs vs. USD, now trading below .96. While higher oil prices have been the catalyst so far, the market has focused on the great economic story taking place north of the border.

Euro (EUR): The Euro is higher against all but the commodity bloc as tomorrow’s rate decision is expected to bring a rate hike. In addition, GDP estimates came in as expected, and German factory orders came in much better than expected showing signs that the Euro zone may be ready for higher rates. However, higher rates loom heavily on the debt-laden countries, and how this plays out will be anyone’s guess.

Pound (GBP): One day you’re up, the next down. That’s the story of the Pound which is seemingly getting conflicting economic reports on a day-by-day basis. Today both manufacturing and industrial production figures came in lower than expected ahead of tomorrow’s rate decision that is expected to leave policy unchanged.

Dollar (USD): Yesterday’s release of the FOMC minutes showed what everyone already knowsâ€"that the FED is deliberately trying to encourage inflation and is committed to a weak Dollar. The markets responded in kind.

Yen (JPY): Once again the Yen is weaker across the board as tonight’s rate decision is expected to provide additional stimulus to the Japanese economy to help in the recovery from the disasters. Yen is at a 6-month low to the Dollar. (Click chart to enlarge)

With Dollar and Yen weakness driving markets, there really is no reason NOT to be in stocks, commodities, and the higher-yielding currencies. Both Central banks are committed to weakening their respective currencies and whether or not you agree with this policy doesn’t matterâ€"as an investor you have to jump on for the ride.

However, I am going to be quick to jump off of the train at the slightest hint that these policies are changing. The most obvious time for this is the end of QE2, which the market speculates could happen sooner than the pre-determined time (but I don’t think so) in June.

This should encourage a bit of selling heading in to it, but my feeling is that because policy has been so accommodative, it will be possible for stocks to continue to rise as rates and the Dollar does as well. Commodities on the other hand, should fall.

But in the meantime, enjoy the inflation (which technically doesn’t exist) and thank Uncle Ben Bernanke as you fork over more and more cash for necessities like food and gas!

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