This morning Fed Chairman Bernanke is doing his best to juice the markets higher during a speech he is giving in Boston. With news such as this, the markets can be extremely volatile as they hang on his every word. Some of the key phrases being reported are Central Bankers around the globe should be concerned with inflation that is too low and the uncertainty surrounding QE2 is less about if and more about how much.
In this regard, he is all but saying that QE2 is going to happen, but much like any Fed-speak, Ill wait until I see it to believe it. These government and banker types are sometimes a lot of talk and little action. What I find striking coincidental is that the November elections are taking place on the 2nd, and the next FOMC meeting occurs on the 3rd. I have a feeling that the outcome of those elections may play a role in the QE2 decision.
In the middle of the Bernanke speech, a slew of economic data reports came out which are contributing to volatility. First, retails sales figures came in at .6%, besting the expectation of .4%, but CPI data came in slightly lower than expected at 1.1% vs. the expectation of 1.2%. In addition, the Empire Manufacturing figure came in much better than expected. So we have a bit of a mixed bag of data which is reflected in market volatility.
Earlier this morning, the Euro zone reported CPI data showing a gain of 1.8%, in line with expectations. As of this writing, the markets appear to be in mild risk-taking mode, with US stock futures moving from slightly negative to slightly positive, with commodities tracking higher as well.
In the forex market:
Aussie (AUD): The Aussie reached parity this morning briefly as Bernankes comments intended to tank the Dollar were briefly successful. (Click chart to enlarge)
Kiwi (NZD): The Kiwi is lower this morning despite the mild risk-taking in the market as the dismal retail sales figures reported yesterday have continued to fuel the decline.
Loonie (CAD): The Loonie is trading just below parity with the Dollar despite the fact that manufacturing sales came in much better than expected. A report is being floated that the BOC may pause on rate hikes as they want to encourage investment but do not want households to run up more debt.
Euro (EUR): The Euro just flipped from positive to negative on who knows what portion of the news over the last hour. On interesting thing to note is that new financial regulation here in the US is reducing forex leverage so we could see some dumping of positions as investors look to comply by Monday. (Click chart to enlarge)
Pound (GBP): No news is good news out of the UK today, as the Pound is slightly higher across the board. Next weeks BOE minutes will present a clearer picture of what the BOE may do going forward. The Pound is still holding above 1.60 vs. USD.
Dollar (USD): The Dollar is mostly higher as the take-away from Bernankes speech plus the US economic data has caused a flip to mild risk-aversion. Its hard to say exactly what has caused this to happen but perhaps the market is becoming less confident of QE2 as market data may not be supporting the Feds position.
Yen (JPY): The Yen is higher today though has pared back gains from Bernankes speech and is trading an 81 handle vs. USD. Mild risk-aversion has contributed to Yen strength, as the correlative effect of a lower Nikkei average overnight. The Yen is testing the new highs put in the other day so the market could be testing the BOJ again. (Click chart to enlarge)
Bernanke is largely noted for his study of the Great Depression, yet there is still so much disagreement of the cause, effect, and resolution of the worst economic time in our history. His steadfast commitment to avoiding deflation at all costs may or may not be the answer, and it is no secret that he is trying to encourage inflation.
But what this textbook-driven academic doesnt understand is the human spirit; and what drives human decision outside of the numbers. One look at Japan should be cause for pause, yet thats not what the history books tell him. If he thinks that society is going to go along with the inflation plan, he is sorely mistaken. If he thinks that destroying the Dollar is the path to success, he is just plain wrong.
There are COUNTLESS differences between the economies of the Great Depression and today. While we were once a great industrial nation during that previous era, we no longer are. What is the point of a lower Dollar if we no longer export anything?
I would agree with this policy if we actually had an industrial base and manufacturing, but all of that has been shipped overseas years ago. With all of these government bailouts and programs intended to disrupt the free market for the sake of political expediency, the problem is actually getting worse.
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