Awaiting the FOMC notes, the USD has sold off as most observers think the Bernanke led Fed will stay the course. This means that the unpopular QEII will continue as advertised. This plan buys debt, which expands the Fed's balance sheet and pumps up liquidity, giving banks more money to invest and lend.
QEII does have some beneficiaries. For example, this week the US Treasury is a seller of $99B new debt consisting of 2, 5 and 7 year maturities. With Bernanke and his boys busy buying paper in the middle of the yield curve, this reduces rates, and the Treasuries' cost to float the new paper.
The lower rates are a mixed blessing. Currently US 2 year notes yield .64%, compared to 1.26% in Britain and 1.32% in the EC. The 5 year note comparison is US 2.0%, Britain 2.42%, and In Euroland, 2.37%. But, the lower US rates are a factor which weakens the USD. Today the euro got a little bump when the ECB President Trichet hinted there is inflation on the horizon to be dealt with in the future. Talk that the Brits were going to raise the rates recently gave the pound a boost. Confirmation of another dissenter in the Bank of England's MPB Committee got some play in the pound today, even though the meeting occurred prior to the disastrous 0.5 drop in the quarterly GDP.
The market will be carefully parsing the Fed's language. Bernanke seems to be of the free money forever school, but hints about expanded growth or inflation might dispel some dollar bearishness. There has indeed been inflation in food and energy costs, but in the US these price increases, while quite real on Main Street America, are not counted in Washington.
Another beneficiary of QEII and the expanded money supply is China. With their currency pegged to the USD, this enables them to competitively flood the world with their products, and keep their factories busy. They are hard to please, however, and the Chinese are complaining about the weaker USD, and the higher price of commodities. As big food and oil importers they are spending more for their imports.
The bankers assembled at Davos Switzerland are also concerned about inflationary commodity prices. According to Market Watch:
"Rapidly rising food and commodity prices are injecting an unwelcome sense of déjà vu into this year’s annual meeting of the World Economic Forum in the Swiss Alps.
Prices for food and commodities are surging to levels last seen in 2008, when a sharp rally in the sector came to an end with the collapse of Lehman Brothers and the ensuing financial and economic crisis.
Oil appears, despite a recent pullback, likely to test the $100-a-barrel level last seen in 2008. Rising food prices, which triggered food riots in India and parts of Africa last year, were seen as an ingredient in the unrest that toppled Tunisia’s president earlier this month."
Last nights State of the Union speech covered a lot of topics but offered few specific ideas to lessen the current 9.4% unemployment rate. A solution, though is more than verbosity, new laws and regulations. This morning the Financial Post, in an article by Barbara Shecter entitled Dodd Frank rules in action - literally, had this to say:
"Ever wonder what nearly 500 new regulations created in the wake of the financial crisis look like?
The U.S. Chamber of Commerce has created a “sobering” interactive chart to illustrate what companies that do business in the United States must deal with as a result of the regulatory overhaul mandated by Dodd-Frank legislation.......
“It would take hours and hours to go through and read every rule on this chart,” says Amanda Engstrom, senior vice president of the chamber’s Center for Capital Markets Competitiveness.
“Just imagine how long it will take agencies to sift through this confusing web of regulation, leaving America’s business owners stuck with tremendous uncertainty as they work to create American jobs.”
As the late Walt Kelly said in Pogo years ago, "we have met the enemy and he is us." The Washington solutions may be the problem.
Lets monitor the news and events and see what the market looks like tomorrow.