Bernanke Brushes Aside Inflation, Focuses on Growth 10 comments
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The currency market is failing to react to Bernanke’s comments today. This suggests that if we have a stronger non-farm payrolls number on Friday, we could see a serious bottom in the U.S. dollar.
The ADP employment report for the month of March was much stronger than expected. However I am skeptical of the accuracy of this report given the fact that it overestimated private payrolls growth for the last 6 months.
click to enlarge
Nonetheless, the rally in the U.S. dollar is strong enough to not ignore.
Although this strength may be partly due to the latest losses reported
by German banks ($2.5B by WestLB and $23B by Deutsche Bank (DB)), the shift
in risk appetite is the real driver behind the move. Gold prices are
below $900 an ounce which confirms that the market is less risk averse.
The markets are simply relieved that another Bear Stearns (BSC) style disaster has not occurred over the past few weeks. No major financial institution is at brink of a collapse and in fact, the oversubscription to Lehman Brother’s (LEH) stock deal indicates that investors still have money to spend.
Yet the comments from Bernanke and the possibility of another negative month of non-farm payrolls growth indicates that nothing has changed.
Even Bernanke admitted that the housing market will continue to weaken, the unemployment rate should rise and the U.S. economy could contract in the first half of 2008.
In fact, growth is still so troublesome that the Fed Chairman has practically relegated inflation to an afterthought. We all know that inflation is rearing its ugly head with gas prices at a record high and rice prices skyrocketing, yet all Bernanke could say was that inflation is a concern, but it should moderate (he also believes that growth should pick next year).
Interestingly enough, rate cut expectations have increased on the back of his comments with the odds of a 25bp rate cut at the end of the month now at 90 percent. The dollar firmed against the Yen but lost ground against the Euro and British pound.
If there was to be a major reaction to Bernanke’s comments in the FX market, it would have happened already. At this point, non-farm payrolls is the only thing that is stopping the dollar from seeing a more significant recovery. I believe that job growth should remain weak, but if it is not, then a quarter point rate cut may be warranted.
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This article has 10 comments:
Thank you, is good to know that, specially after main
US and EU financial institutions balances on monday
revealed that capital is not more than 5% of assets
in the main US financial players, and worst in EU,
scary...
March 31
Fiscal Year 2007: Capital/Assets
US
Bear Stearns 3,0%
Morgan Stanley 3,0%
Merril Lynch 3,1%
Lehman 3,3%
Goldman Sachs 4,5%
Citigroup 5,2%
JP Morgan 7,9%
Wells Fargo 8,3%
Bank of America 8,6%
Wachovia 10,2%
Europe
UBS 1,9%
Barclays 2,6%
Commerzbank 2,6%
BNP Paribas 3,5%
Credit Suisse 4,4%
Royal B Scotland 4,8%
BBVA 5,6%
HSBC 5,8%
Santander 6,3%
Inflation is an increase in the supply of money, not prices.
Prices CAN be an effect of inflation, but are not the cause.
Rising heat is the cause of higher temperature.
Higher temperature cannot cause rising heat, because temperature is the measurement of the phenomenon, heat.
Is it possible to have rising temperature without rising heat?
It is not.
finance.yahoo.com/q/bc...
You may have misunderstood Vinz. Of course rising gas prices cause inflation *in gas*, but overall economy-wide inflation cannot exist without printing money.
To illustrate, gas goes up, people shift money from wide-screens to gas, so gas inflation rises, tv-inflation falls, no impact (on average) on economy-wide inflation. That takes the printing presses.
The Administration has the power to declare an energy crisis. To most of us, $4 gas or paying $3.50 for a gallon of milk doesn't break the bank. But to half of America, it does and energy along with falling home equity means most American's are quickly reducing spending.
The plan goes like this: The President declares crisis and de-regulates domestic drilling everywhere. Nuclear plant build out regulation is softened. $150 B from Treasury goes into rapid acceleration of nuke plant build-out, biodeisel and coal liquification. Another $50 B is provided to the SBA & specific commerical banks (those with healthy balance sheets) to loan the service industry (75% of America these days) the funds for entrepenuars to start thousands of new businesses that will service the energy sector along with infrastructure start-up money.
Millions of jobs will be created and the price per barrel of oil would crash immediately after the announcement, helping Main St. tremendously in the short-term.
Will the Administration to this? It's yet to be seen. If it doesn't we will have some recover in the second half of the year, but by the end of next year be in full blown depression, because it only takes one Central Bank to fail to cause systemic collapse. Sure, the Fed might be able to bail another out now maybe even two, but the Middle Class of America who will pay this burden later cannot bear added massive taxes on top of exorbident inflation, housing correction etc. We must innovate our way out of this mess and eventually export energy products.