But will this continue into 2011? Well at some point the scam that is the official inflation report will be unable to contain rising prices, even if housing continues to fall. Just yesterday we saw lower than expected housing prices, though this should not come as a surprise given the fragile recovery.
This means we are likely to see higher interest rates both here in the US and abroad. Countries that are counting on austerity measures to slow down demand may be deluding themselves as folks have to eat. No one is going to care that TV prices have come down if milk cost $6 a gallon and it costs $4 gallon in gas to get to the store. Rising interest rates will put further pressure on housing prices, so next year is going to be interesting from a monetary policy perspective.
In Germany, CPI data has already come in higher than expected this morning and while not at critical levels, could be a sign of things to come.
At what point will public backlash influence weak-willed politicians, or will calls for action fall on deaf ears? China is attempting to control inflation by every means policy EXCEPT monetary policy. Eventually this dam will burst and I can foresee social tensions rising.
Are we having fun yet? Today is pretty much finished with economic news, so let’s see if the risk appetite that we are seeing this morning continues throughout the day.
In the forex market:
Aussie (AUD): The Aussie is mostly higher as risk appetite has increased due to a weak USD. The Aussie looks as though it may be putting a double top vs. USD which could signal a reversal. (Click chart to enlarge)
Kiwi (NZD): The Kiwi is higher across the board as the market is anticipating NZ as the next commodity currency to raise interest rates. Because markets are forward-looking, the Kiwi is faring better then the Aussie today.
Loonie (CAD): The Loonie is taking its cues from the oil which is “lower” to 91.25. I guess market participants read my blog yesterday and saw the folly of their investment decisions. Oil inventories will likely show a build-up in supply despite the recent cold weather.
Euro (EUR): The Euro is mixed this morning as higher than expected CPI data in Germany (1.7% vs. an expected 1.5%) and Dollar weakness is offset by a stronger Pound and Yen.
Pound (GBP): The Pound is higher this morning as reports show that mortgage repayments in the UK are taking place as expected. The “wait and see” approach adopted by the BOE may result in further inflation before the effects of the austerity measures begin to kick in.
Dollar (USD): The Dollar is weaker across the board to start the day as risk appetite appears to have heightened. Yield-seeking investors who may seem confident that the lack of economic data supports an economic recovery theme may be set up for a fall.
Yen (JPY): The Yen continues to show some strength as exporting companies buy Yen to repatriate their earnings abroad, providing temporary demand. However, should the market continue to push Yen strength, then we could see the BOJ heat up the jaw-boning rhetoric again. (Click chart to enlarge)
The lack of news to close out the year has some market participants thinking that it is “game on” to take on risk. With markets near two-year highs, this may make sense to some. However, this is not the time to initiate new positions.
End of the year window-dressing plus a convenient story to push commodities higher (foul weather) may be short-lived.
Be on the lookout for my 2011 economic predictions later this week!
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