Four at Four: Fed Frags the Dollar
by David Gaffen
[color=#990000] The dollar has suffered against the pound and euro. (Yahoo Finance)
People talk about the Federal Reserve being a slave to the markets, but it’s not markets, it’s just “market,” that being the equity market. Like a politician that promises everything to some and little to others,
the market the Fed continues to brush off is the currency market, where the dollar continued to weaken after the
Fed both cut interest rates and warned of more inflation, only increasing the jitters among those looking for higher-yielding assets elsewhere. Ashraf Laidi, chief foreign exchange analyst at CMC Markets, points out that the U.S. now has the same central-bank reserve rate as Canada, and continues to lose its higher-yielding advantage against all but the Swiss and Japanese. Others agreed. “All in all seems like
the interest-rate differentials will continue to widen and the U.S. will be on the losing end of it,” says Camilla Sutton, currency strategist at Scotia Capital. And Fil Zucchi of Minyanville.com concludes that the Fed’s inattention to the dollar’s weakness will doom it eventually.
“In my humble opinion the odds of a dollar crisis are growing faster than Boom Boom can drop Benjis on the economy, and the rest of the world is voting with its feet as to what they think of his policies,” he writes.
Of course, the
reaction out of the equity market wasn’t all that bewildering. After all,
allow a six-year-old child to eat all of his Halloween candy, and one can’t be blamed when he’s bouncing off the walls a few hours later. After all, the stock market got what it wanted, which was its candy, as the Fed apparently was swayed by the market’s expectations, which basically amount to worrying that something worse was going to happen (even with stocks near record highs and
oil closing in on $95 a barrel, but never mind all that). “There have been numerous recessions and market crashes caused by credit going from being too loose to too tight,” notes Charles Rotblut, chief strategist at Zacks Investment Research.
Fear was enough — the Fed fearing the markets. So the Dow industrials finished 136 points higher, a gain of about 50 points from the pre-Fed rally, as investors gobbled up whatever they could by taking the
“it’s all good” approach to analysis of the Fed statement. That is to say, the economy is doing well but could slow, which is still good, because more rate cuts! And if not, no worries, hey, look, candy.
[color:6d35=#990000:6d35]Homebuilders reacted badly to the Fed.
Which is to say, there’s one sector that did not react well to today’s release. The homebuilders, measured by the
SPDR S&P Homebuilders ETF, dropped like a stone at the release, tag-teamed by the mention of the slowing housing economy and the potential for rising inflation, both of which mean bad things for the industry. The index finished down 3% today, and picked up speed as it rolled downhill.
Rising inflation reduces consumption and worsens the outlook for home sales (no matter what the National Association of Realtors is saying in radio commercials) and also leaves open the possibility that the Fed is indeed finished with action for a while, which would seem to limit the likelihood that bank lending rates will decline further (not that banks are going to be easing lending standards anytime soon).
“The pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction,” the Fed
said. No kidding.
Sources as disparate as Tony Crescenzi, chief bond market strategist at Miller Tabak, and John Williams, who runs the Shadow Government Statistics Web site,
called shenanigans on today’s advance third-quarter GDP report because of a sharp decline in the annualized inflation indicators present in the report. “The nominal (not adjusted for inflation) numbers tell a different story. There, annualized third-quarter growth slowed to 4.67% from 6.56% in the third quarter,” writes Mr. Williams.
“The reason that “real” growth increased is that annualized inflation, as reflected by the GDP deflator, sank to 0.77% in the third quarter from 2.64% in the second quarter.” Mr. Crescenzi notes that the deflator grew at its slowest pace since 1963, way off the consensus for 2% — which would have reduced growth to 2.7%, rather than the 3.9% reported by the Bureau of Labor Statistics.
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Wed Oct 31, 2007 10:17 pm
Analysis of the Federal Reserve these days resembles nothing so much as a warped Charlie Kaufman film, with hordes of economists trying to get into Ben Bernanke’s head and achieve some kind of measure of control without getting dumped out onto the New Jersey Turnpike. When economists are busily applying Psychology 101 to a breakdown of the Fed’s decision, it’s a good indication the Federal Open Market Committee has been sending out mixed signals of late. Various commentaries in the last two days have been prone to focus on the Fed’s view of the markets (and vice versa) and the messsage that might be sent — regardless of what’s warranted for the economy. “They seem to be struggling with their view and the uncertainty of risks and like central bankers of old somehow view easing as a reward to bratty markets and irresponsible consumers (in the form of home buyers),” says David Ader, fixed income strategist at RBS Greenwich Capital. “If anything argues for a simplistic inflation targeting Fed, this sort of message-anxiety is it.” 