FYI | Jun 08 2008
By Greg Peel
The US Federal Reserve is now between a bigger rock and a harder place – just because of the events of last Friday. Just when the world thought there was sufficient evidence of demand destruction in the US to bring the price of oil back to at least a slightly more palatable level, Israel had to go and open its big mouth.
Geopolitical tension in the Middle East and elsewhere has never gone away, and if history is any indication never will, but tensions had at least slipped into the background. There is still a war in Iraq, there is still rebel activity in Nigeria, there is still a lot of fist waving in Venezuela, and Iran is continuing to pursue its nuclear agenda while threatening to wipe Israel off the map. The Israeli threat made on Friday was not “clear and present”, but nor can it be dismissed. US$150 oil is already been predicted by many, and that price will look cheap if Israel acts as suggested.
Which provides a big headache for Ben Bernanke, who had at least thought he might have been in a position to raise, rather than lower, the US cash rate shortly in order to fight inflation. But on the strength of Friday’s unemployment number, any raising of the rate could cement a recession that had so far looked like having been averted. The Fed will likely now have to adopt the ECB position of the past months, and simply hold fast. The May CPI number is released on Friday, and is probably something Bernanke is not looking forward to.
The Reserve Bank of Australia is in a similar position, given economic data appeared to be showing sufficient slowing to stave off the need for another rate rise, right up until the release of the first quarter GDP. At 0.6% growth, the figure blew away consensus forecasts of 0.2-0.3%. While the data are nearly three months old, greater than expected economic strength does not bode well for keeping wages from rising. That threat, and the big improvement in the terms of trade (and subsequent fall in the current account) are exactly what the RBA is wary off. Thus when inflation expectations are released this week, the RBA will be watching closely.
Inflation expectations are significant, because if businesses believe high inflation is only short term, they will not raise prices and risk destroying demand. But if they believe inflation is here to stay, they will raise prices now to avoid being caught out on price jumps for the next round of inputs. Similarly, workers will start pressing for more pay.
Monday in Australia is the Queen’s Birthday holiday. On Tuesday we learn April housing finance and on Wednesday June consumer confidence. Thursday is a biggie, with the aforementioned inflation expectations for June being released along with the May employment numbers. Friday we get a rest.
In the US it’s April pending home sales on Monday, and the April trade balance on Tuesday. The trade balance in the US is significant. If a weaker US dollar has succeeded in reducing domestic demand for imported flat screen TVs, but bolstered global demand for iPhones, then the US current account deficit will fall again and this provides some support for the greenback.
Wednesday sees the release of the Fed’s Beige Book for May – a survey of economic activity and outlook. Thursday is May import prices and, more importantly, May retail sales. Have Americans saved or spent their stimulus cheques? Friday is the Michigan Uni consumer confidence measure for June, and the aforementioned May CPI.
Elsewhere Japan makes a rate decision on Friday but once again 0.5% appears safe. Another figure of interest, in the wake of the Bradford & Bingley debacle in the UK last week, will be April UK house prices, released on Tuesday.
