ECB Has No Option Than To Stay Put At Today's Meeting

Thursday, May 08, 2008

Conflicting inflation indicators peppered with a breakdown in Eurozone retail sales will probably tilt the governing council of the European Central Bank (ECB) to vote for an unchanged leading overnight interest rate, standing at 4% since June 17, 2007.
ECB president Jean-Claude Trichet will be happy to announce that Eurozone inflation moderated to 3.3% (3.6%) in April, according to Eurostat. It is questionable, though, whether this recent downtrend can persist. Industrial Eurozone producer prices continued their steep ascent, coming in at a monthly plus of 0.7% in March, raising the annual rate to 5.7% (5.3%) . In the EU 27 industrial producer prices advanced 6.7% (6.1%) YOY. Growing consumer and gasoline prices have begun to lead to a shift in consumption patterns. Europeans make a pass on shopping malls, stretching their incomes for the necessities of life.Retail sales dropped 1.4% YOY in March, posting the strongest decline since statistics begun in 2000.
In short, expect no action but more soothing words that inflation will moderate next year. We've heard that since 2005. While inflation would require higher rates in the Eurozone the ECB will certainly not mess with the current strengthening of Federal Reserve Notes that may lead to the 1.50 threshold within the next weeks.
In inflation were a real concern, and not the bailout of European banks flooded with all the liquidity they beg for, the ECB would take a rate hike step to restore its credibility as an inflation fighter and an inflation fighter only, as written in their mandate.

FOMC Cuts Rates As Expected Amid High Uncertainty About Inflation

Thursday, May 01, 2008

The Federal Open Market Committee's (FOMC) widely expected move to cut the Fed Funds rate by 25 basis points to 2% fails to instill confidence. Citing both the sagging economy and a highly uncertain inflation outlook the FOMC favored in an 8-2 split vote to try and stimulate the economy with cheaper credit.
This will not go down well with consumers and businesses suffering from a parabolic development of their daily expenses. CNBC had an interview with the president of the American Retail Bakers, whose name I did not jot down. The lady was not too happy about the Fed's move. She would have preferred to see a sign that the Fed is truly concerned about inflation and will do something against it. Wall Street was disappointed too. In a classic "buy the rumour, sell the news" move it erased its gains made earlier in the day and ended flat.
The FOMC statement was hardly changed.
Recent information indicates that economic activity remains weak.
This may indicate that the FOMC assumes that the economic downturn begins to flatten out. In March the FOMC had stated "that the outlook for economic activity has weakened further."
Household and business spending has been subdued and labor markets have softened further.
The credit crunch that obviously does not abate despite the orgy of irresponsible rate cuts since last August seems to have spread in the perception of the FOMC. In March they only mentioned slower growth in consumer spending.
Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.
No changes here. The outlook remains terrible. At least the Fed has more polished words for a drawn out slump.
Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months.
In order to come up with at least one improvement the FOMC points to the unpopular core inflation rate. This ain't gonna help at the gas pump or at the super market. Regarding the second part I am immediately reminded that Alan Greenspan in his late days as Fed chairman said that gold is an excellent inflation indicator. Gold closed higher after the release of the statement. The first, albeit weak correction in gold's downtrend may be seen as a sign that gold is currently heavily oversold.
The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.
A comparison with the March statement evokes the thought that even the Fed has arrived at the opinion that inflation will remain a problem.
There must have been an intense discussion of accelerating consumer prices. Fed presidents Richard Fisher (Dallas) and Charles Plosser (Philadelphia) had
preferred no change in the target for the federal funds rate at this meeting.
Re-reading the dovish FOMC statement I again conclude that Federal Reserve Notes (FRN) will soon continue their fundamentally driven descent. As written a month earlier there are no signs that the Fed will veer from its textbook course how to incite hyperinflation in order to satisfy the financial sector's unrelenting demand for more cheap money.
As the Fed has not changed its questionable strategy I see no reason to change mine and stay long commodities and precious metals. The current correction will remain a correction in the long term uptrend. We are a long way from the end of this inflation cycle that may have escaped the boundaries of central bank policy already.
FRN's could take their next hit next week. Increasingly hawkish tones from Eurozone central bankers open the possibility that the European Central Bank (ECB) may strengthen its words on May 8 and prepare markets for some action in the summer. Central banks around the world have tightened rates for a while now. Only Japan, the Eurozone, the UK and the USA have missed the train of monetary responsibility, instead preferring to feed an ailing banking sector that went berserk in the absence of effective regulation.

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