Inflation Taking a Break

by: David Andrew Taylor

A-ha.... Again!.... Sort of. We saw yesterday's inflation releases soften for producers. The hope was that there would be a mirror for today's consumer reading. All we really saw was a pause in the larger than normal growth of inflation changes. We didn't see a drop in the y/y change like we did yesterday, which helped sooth fears of rapid inflation. We did see a drop in the m/m change which is soothing. Are we out of the inflation forest yet? Not just yet. But, the drop in growth rate is a likely sign that we're not going to see inflation rip through the nation forcing the Fed to move aggressively. But, just because there was a decrease m/m in the core rate doesn't mean there's been a change in the direction of the y/y change. I doubt that this is going to be a thorn in the side of the Fed. But, it doesn't really make me all warm and oozy when I look at the chart:

I jumped on the "The Fed is on to something" bandwagon at the conclusion of the last meeting. This position wasn't exactly echoed by other pundits out there. This wouldn't be the first time that I've taken the "not so popular" route, either. I tend to be slightly ahead of the curve... but that's not necessarily a good thing being a trader. I will, however, stick to my guns that the Fed has it right and has a better handle on the economy than most are willing to give them credit for. As it is turning out, they are starting to look a little more right. Today's release may help sway a few more market participants in the same direction.

My FX Trading Plan:
Market reaction to today's release has been a lot more muted than I would have expected. Could be a few reasons. First: Dog days of summer. No one is around to actually trade the news. Second: Perhaps there is some market sentiment out there that states that fi the Fed is done, perhaps so are other central banks. We know that the Bank of Canada is not likely to move any time soon. Japan? The market may need to get used to the idea that the future of interest rate increases is going to be softer than originally hoped for. Australia? They have been pushing rates up quite a bit. But, the recent employment activity and inflation releases may keep the hand heavy with the new Bank chief down there. Britain? The surprise may be all that is in store. ECB? I'm betting they disappoint more often than not.

I'm really seeing the dollar contained. Sideways. That is a market direction, you know. So far, that's worked out very well for me.

My S&P 500 Trading Plan:
I can see it now... dancing... skipping... and frolicking around the trading posts. It will be hard for traders to contain themselves now that there is even a slight whisper that the Fed is likely to remain on hold. I've turned bullish because of the interest rate pause. It's a longer-term outlook with contained growth in this quarter and increases (along with continued increases in personal incomes) in the Q1 2007.