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Posted at 6:53am on Jun. 10, 2008 Market Mover: Dealing With Higher US Inflation

Geithner Drops a Hint, Bernanke follows with a bomb

By blackhedd

A funny thing happened this morning as I was writing a story for you about Timothy Geithner’s important speech yesterday at the New York Economic Club: Inflation came back.

Geithner is the President of the New York Federal Reserve Bank, and his main topic yesterday was the gap between today’s innovative financial-market practices and the regulatory apparatus (including the Fed) that is supposed to keep markets stable.

This is a critical topic of great interest to policymakers around the world, and a consensus is growing that a “unified global framework” for financial regulation is needed. I’ll write a complete post about this subject later on.

But in the Q/A after his speech, President Geithner was asked (inevitably) about where the economy is going. He said that demand is getting softer, but he also said that the Fed will be watching inflation very carefully.

Federal Reserve officials always tread a very fine line in public statements because they know everyone will parse every comma for signals about the direction of interest rates. By emphasizing inflation over economic slowness, Geithner left an impression that they might head higher.

Keep reading…

Posted in Bernanke | Economy | federal reserve | geithner | inflation | Interest rates — Comments (9)/ Email this page » / Read More »

Posted at 12:29am on Mar. 19, 2008 So The Fed Instituted A 75 Basis Point Cut . . .

By Pejman Yousefzadeh

And left people like me--who were expecting a hundred point cut--quite surprised. But Wall Street reacted well. In correspondence with Brother blackhedd, my fellow Contributor at RedState, he informs me that contrary to what was widely reported in the news, the 75 basis point cut was not as much of a surprise to traders as we might have been led to believe and that the market was perhaps heartened that the Fed did not believe that a cut of a full percentage point was needed. By keeping the cut to 75 basis points, the Fed left room for itself to fight inflation while at the same time, stimulating economic growth. A larger cut may have evinced panic about market conditions and the last thing the Fed wanted to do was to panic. The market's upward movement was a signal of its admiration.

Fair enough. Brother blackhedd knows much concerning these matters and given the fact that I want to be an optimist, I am more than happy to hope that his optimistic appraisal of the situation is the correct one. But the following from this story:

The two dissenters in Tuesday's decision were Richard W. Fisher, president of the Dallas Fed, and Charles I. Plosser, president of the Philadelphia Fed, both of whom have been outspokenly hawkish about inflation issues in recent months.

Several analysts said the dissent and the Fed's warning on inflation indicated that policy makers struggled to agree on even the smaller rate reduction.

"I'm disappointed," said Robert V. DiClemente, chief United States economist at Citigroup. "It's not as if we're trying to gauge policy priorities on a sunny day. I'd like to know how you're going to get inflation in an environment with suffocating financial restraint and pervasive slowing in demand."

These are my concerns as well. And one wonders how easily Bernanke will be able to engender another rate cut in the current environment if he has to. Will the other members of the Federal Reserve Board shut down such efforts for fear that they might exacerbate inflationary pressures? I would think that a weakened economy will do a good enough job of that--the precedent of stagflation notwithstanding.

Posted in Economy | federal reserve | Interest rates — Comments (8)/ Email this page » / Read More »

Posted at 9:01am on Mar. 10, 2008 Ominous Events in the Mortgage Markets This Past Week

Metastasis

By blackhedd

Several very important things happened in the market for mortgage-backed securities (MBS) this past week. They're technically arcane and hard to reduce to sound bites, so they didn't make a big ripple in the news. But the effects will be far-reaching.

Many published reports (here's one) at midweek had it that UBS (the Union Bank of Switzerland) had dumped a $24 billion portfolio of securities backed by Alt-A mortgages, which are intermediate in quality between prime and subprime.

According to the whispers, UBS received 70 cents on the dollar for the position. (The rumored buyer is interesting too. More on that in a moment.)

You know what happens when the guy down the block sells his house. The price he gets becomes a "comparable transaction" that affects the perceived market-value of your own house. Same thing happens with illiquid securities like MBS.

Read on...

Posted in credit crisis | Economy | federal reserve | Interest rates | mortgage — Comments (73)/ Email this page » / Read More »

Posted at 11:19am on Jan. 23, 2008 Big Rotation in the Financial Markets This Morning

And the wild ride continues

By blackhedd

US stock markets plunged about 250 points (more than 2%) on the open this morning. This move was anticipated by futures markets, and follows sharp recoveries overnight in Asian stock markets. Major stock markets in Europe are down anywhere from 2 to 4 percent.

A few minutes ago, US stocks spiked upward and are down 100 points as I write this.

The mood is very busy, but not frantic or panicked as it was yesterday. The key thing that appears to be going on is rotation out of the stock market by some very large institutions. One externally-visible piece of evidence for this is the bond market, which is on an absolute monster of a rally, with the yield on the 10-year note down to 3.34%. (The 10-year rate is the one that has the most to say about how much you pay for your mortgage. Two weeks ago it was around 3.80%. A year ago it was nearly 5%.)

A fair interpretation of this morning's action is that the large professional money managers have decided to cut their exposure to US stocks. This may be an expectation of recession ahead, but it's more likely to be uncertainty about the outlook.

Two key pieces of the news background: late yesterday, Apple Computer announced a huge December quarter, with profits and revenues both up by tens of percent. But investors were disappointed that the company didn't do even better. Apple's guidance for the current quarter was perceived to be weak, but they reported no slowdown in sales. In this environment, all news is bad news.

Another negative factor occurred in Europe overnight, as European Central Bank president Jean-Claude Trichet commented that the ECB is still concerned about inflation. Market observers had been hoping for an interest-rate cut to follow the Federal Reserve's emergency cut yesterday. That was disappointing. But the dollar is stronger against the euro this morning, suggesting that the markets expect the ECB to throw in the towel soon enough.

Crude oil is down sharply again. It looks like a lot of money is going on temporary loan to the US government. And that is likely to be the story for the near-term and possibly longer.

In politics, Congress and the Administration have accelerated their work on a Keynesian stimulus plan, with Majority Leader Reid promising to have a bill completed by late February.

They needn't bother. I don't know a single serious observer who expects that the government has anything on the table that can help either the markets or the economy. It's almost ridiculous to see our elected officials running around like chickens without heads. (And they barely have brains to begin with.)

Posted in Economy | federal reserve | Interest rates | Stock Market — Comments (10)/ Email this page » / Read More »

Posted at 12:22pm on Jan. 19, 2008 Should the Federal Reserve Aggressively Cut the Fed-Funds Target Rate?

The word from conservative economics commentator Larry Kudlow

By blackhedd

I just happened to be listening to one of RedState's friends, Larry Kudlow. He has a Saturday-morning talk show on WABC-radio here in New York City. He has a lot of intelligent things to say about the potential policy responses we can make to the current economic situation, most of which I agree with.

He does recommend that the Federal Reserve aggressively reduce short-term interest rates. It's taken me longer than some people to come around to this point of view (the only-marginally sane Jim Cramer has been howling about this since August.)

Keep reading...

Posted in Economy | Interest rates | Larry Kudlow — Comments (15)/ Email this page » / Read More »

Posted at 6:59pm on Jan. 10, 2008 Everyone Likes Ben Bernanke Today

By Pejman Yousefzadeh

With the economy facing the possibility of a recession, people are consistently looking to the Federal Reserve to lower interest rates. Today, the Fed Chairman indicated quite clearly that he and the Fed are prepared to do just that:

Stocks rose in volatile trading Thursday after Federal Reserve Chairman Ben Bernanke soothed investors by stating that the central bank is ready to lower interest rates to shore up the economy.

The Dow Jones industrial average initially jumped more than 130 points on Bernanke's comments but bobbled up and down, perhaps because investors realize that it will take more than rate cuts to restore the economy's upward momentum. Still, Bernanke's comments appeared to reassure a market that has stumbled since the start of the year amid growing evidence that the economy is weakening.

The Fed chief said the central bank is prepared to act aggressively to rescue a weakening economy.

"We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks," he said.

Jim Herrick, manager of equity trading at Baird & Co., said, "We're seeing this pop here, but I think it's temporary."

He added that many investors have been betting for some time that the Fed will lower rates by a half-point at their next meeting. "There's still subprime issues. We still have concerns about earnings, and the mortgage market."

Eventually, of course, the Fed will have to confront and counter the threat of inflation, especially in the food and energy sectors, which are even more volatile than usual. But for now, giving the economy a jump start is a major issue and the Fed is right to contemplate a hefty rate cut.

Posted in Ben Bernanke | Economy | federal reserve | Interest rates — Comments (3)/ Email this page » / Read More »

Posted at 10:33am on Jan. 4, 2008 Weak Employment Numbers from the Department of Labor

Sectoral Rotation in December

By blackhedd

A much-anticipated report from the Labor Department's Bureau of Labor Statistics (BLS) shows that employment in the US added 18,000 new jobs last month. This was far less than the consensus estimate of private economists surveyed by news organizations.

The markets have been waiting for this report for several weeks, as the usual holiday-season paucity of news and trading activity gave them little else to focus on. But the news comes as a slug in the gut. It touched off an instantaneous, rocket-propelled rally in the US Treasury market. As I write this (9:10am EST), the 10-year note is up 14/32, and its yield is down to 3.84%.

More...

Posted in Economy | Interest rates | unemployment — Comments (14)/ Email this page » / Read More »

Posted at 8:41am on Dec. 12, 2007 What Interest Rates are Telling Us About the Outlook

The Federal Reserve Disappoints Wall Street

By blackhedd

You've read the headline: the Federal Reserve Open Market Committee, meeting in Washington yesterday, announced a cut in short-term interest rates. The "fed funds rate" will now be targeted at 4.25%, down 25 basis points from the 4.50% rate that was announced in October. The Fed also cut the "discount rate" (at which banks may borrow money directly from the Fed) by 25 basis points.

The moves had been carefully telegraphed and were no surprise. But to say that Wall Street was disappointed is understating the case. The stock markets sold off on the news, with the Dow Jones Industrials Average dropping about 350 points from where it was when the Fed's announcement came out in mid-afternoon. And the bond market soared. There was actually a lot of anger out there.

What happened?

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Posted in Economy | federal reserve | inflation | Interest rates — Comments (32)/ Email this page » / Read More »

Posted at 3:33pm on Dec. 11, 2007 Evidently the Stock Market was Looking for More

By blackhedd

Stock markets in New York are selling off sharply on the expected news that the Federal Reserve Open Market Committee, meeting in Washington today, have decided to cut the fed funds target rate by 25 basis points, to 4.25%. Bond markets. as expected, reacted positively, with the 10-year US Treasury note yield down to 4.06% as I write this. Expectations for a 50-basis point cut in rates have been reduced in recent days, among my contacts at any rate, as the economy has showed surprising resilience to the credit and housing crises. Maybe the stock market was hoping for a full 50. Maybe they're just selling on the news.

Posted at 8:26am on Nov. 21, 2007 What The Strong Yen Means

Currency Strength and Quasi-Depression, Japan-style

By blackhedd

As the US dollar weakens, other currencies necessarily increase. The euro is now trading above $1.48 to the dollar, a record high. And the Japanese yen is stronger than 109 to the dollar, a two-year high.

All currency movements proximately reflect differentials in short-term interest rates. The weakness in the dollar over the last two months was caused by the Federal Reserve's interest-rate cuts in September and October.

Underlying economic fundamentals in each respective currency zone also affect exchange rates, since they have an impact on market interest rates as well as policy interest rates. Speaking very broadly, a lower currency value can reflect concern about the business outlook for a particular country.

This analysis holds reasonably well for the dollar-euro rate. But what's the story with the Japanese yen?

More...

Posted in Dollar | Economy | Interest rates | Japan — Comments (11)/ Email this page » / Read More »