This is excessive prodding by the Fed is having the reverse effect of what was intended and the costs no longer outweigh the benefits. So far, it has been all monetary policy guiding the ship and its time the politicians in Washington step up and do something about fiscal policy.
Don’t expect that to happen any time soon though as the US slips into further mediocrity because politicians are to busy campaigning and not doing the job they were elected to do. As the US loses further clout and credibility on the world stage, it will be much harder to maintain influence. In fact, Chancellor Merkel of Germany is here in the US accepting an award of some sort, yet she is completely vilified in her own country despite Germany’s economic strength.
And speaking of German strength, factory orders came in much better than expected earlier this morning, as did Euro zone retail sales figures. However, the Greek debt crisis is still present and the “solution” of a roll-over of Greek bonds is unclear as to the response.
Overnight in Australia, the RBA left rates unchanged as expected, and the dovish accompanying statement has caused some Aussie weakness this morning.
However today the markets are set to open higher, with global stocks and gold leading the way. Oil has pulled back to a 98 handle, as Saudi Arabia said it will increase production. So the markets are moving more on individual fundamentals this morning than broad risk themes, though reversion to mean could take place.
In the forex market:
Aussie (AUD): The Aussie is mostly lower after the dovish comments from the RBA who maintained that current interest rates are “appropriate”. At 4.75% they might be right, but expectations of a further hike have been diminished.
Kiwi (NZD): The Kiwi is the main beneficiary of the RBA rate pause, as the RBNZ rate policy meeting is tomorrow afternoon and it represents the next possibility of a rate hike. While no change is expected, the statement could be a bit more hawkish as the NZ economy has fared better than most have expected.
Loonie (CAD): The Loonie is strengthening despite lower oil prices after yesterday’s PMI figures beat expectations. The Canadian Finance Minister Flaherty said yesterday that Canada is looking to balance its budget within the next 3 years which elicited a favorable response from the markets.
Euro (EUR): The Euro is mostly higher after retail sales figures came in better than expected, showing a gain of 1.1% vs. an expected no change as the monthly figure rose .9% vs. an expected .3%. In addition, German factory orders rose 10.5% vs. an expectation of 9% showing signs of strength. Now if they can just get that pesky debt crisis ironed out.
Pound (GBP): The Pound is mostly higher as well as Dollar weakness on risk taking is causing the safe-havens to sell off. While Thursday’s rate decision is expected to provide no change, the release of the minutes will be more important.
Swissie (CHF): The Swissie is getting a respite from recent high demand as the safe haven currency is out of fashion today despite CPI data which came in slightly higher than expected at .4%. A rate hike would seem inappropriate at this time.
Dollar (USD): The Dollar is mostly weaker as risk taking is picking up steam as there is no really important data from the US that could derail sentiment. Unless Bernanke says something dumb later today, which is unlikely.
Yen (JPY): The Yen is selling off this morning as safe haven demand is decreasing and carry trades are starting to be re-established after last week’s selling. Japanese GDP figures are due out tomorrow night and are expected to decline which could prompt the BOJ to act to jump-start their economy.
It’s put up or shut up time here in the US. The markets and the economy have had ample to time to prepare for the day that the music died, i.e. the end of QE2. The fact that politicians have done nothing on the fiscal side of the equation has left us severely unbalanced.
While the Fed may have been the root cause of the crisis, they are now the only hope for a solution. The longer these non-actions play out, the more the uncertainty will persist which will continue to keep us in this economic malaise.
While I am not an economist, I’ve begun to hear rumblings that the true effects of QE2 haven’t been felt yet. As the massive liquidity makes its way through the markets, this could set off some inflationary factors which coupled with economic disinterest could land us square in the middle of stagflation which is the worst possible scenario.
Only time will tell what happens, and we are running out of it as the clock is ticking!
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