FYI | Aug 15 2006
By Greg Peel
There may have been an air of let’s get back to business as US stock markets enjoyed ceasefire conditions in the morning session. Aided by an oil sell-off, which was due both to the ceasefire and to an announcement by BP that Alaskan supply would only be halved, not completely halted, the Dow Jones Industrial Average set about recouping 115 points.
But it wasn’t to last. Buying enthusiasm started to fail around lunch time and it became apparent that the rally was more of a bounce-back from oversold conditions than a genuine bout of renewed confidence. Some post-ceasefire scrapping between Hezbollah and Israeli troops threw in some doubt, and the oil price regained some of its fall. The Dow closed up a mere 10 points at 11,098.
But what is most influential at this time is the ongoing threat of inflation. The Fed may have paused for one month but economic data have done nothing to quell fears that the Fed will make good on its caveats and raise rates once more. It is clear that until a genuine end to monetary tightening can be ratified, the stock market will remain volatile and vulnerable.
Tomorrow night in the US sees the release of the core producer price index (PPI) inflation indicator, followed on Wednesday by the headline consumer price index (CPI) figure. There is little to suggest these numbers won’t be worrisome.
The Fed is still caught between its rock and hard place, given it risks sending the US economy into recession with further tightening, inflation aside. It may yet prefer to observe the effects of recent rate increases rather than barrel in once more. It is the paradox of monetary policy that a decision made today will not fully flow through for 12 to18 months, yet policy decisions appear to be driven by last week’s data.
Either way the mere threat of another rate rise is apparently enough to snuff out any attempts by the US stock markets to rally, and major moves have been thwarted twice in the last week.
The possibility of another rate rise is also holding up the US dollar. The paradox here is that virtually every economist and his dog is tipping an economic slowdown and subsequent fall in the US dollar, yet the greenback just keeps hanging in there. It became a safe haven for the world when the Israel-Lebanon conflict broke out, so one might have expected a pullback on the ceasefire. This was not to be.
If inflation is worse than even now expected this would surely affect further slowing of the US economy, yet the simple mathematical adjustment of interest rate parity is suspending the dollar in anti-gravity land.
This has had a detrimental effect on the gold price, which had curiously struggled as the entire Middle East region threatened to become one big war zone. However, movement towards the dollar as the preferred safe haven has forced the gold price to drift lower in the last couple of weeks. With the oil price falling last night, and the dollar holding up, gold was again sold off to be trading around US$626 heading into our time zone.
Nevertheless, James Moore, analyst with TheBullionDesk.com, noted "With Iraq still on the verge of civil war, and Iran and North Korea’s nuclear policies a cause for concern, geo-political tensions are still extremely high, with some investors likely to view gold’s current dip as a good area to enter the market."