Inflation and oil the talk of debt consolidation

Inflation and oil continue to be the main focus of the debt consolidation markets.
Yesterday saw the US Dollar gain across the board on the back of oil retreating to as low as $126 at one point. Also supporting the USD was better than expected durable goods orders which declined less then forecasted revealing a surprisingly robust data given the current conditions while weak French consumer confidence weighed on the EUR.

The move in oil has since reversed however with Crude back through $130 a barrel on the back of Nigerian supply concerns.

Moving on to inflation which appears to be the main concern in the markets and whether economies can avoid the nasty Stagflation monster.

The USD has received a boost from comments made by Fed members yesterday. Fisher started last night with stating inflation is the bigger risk to the economy and a concern to all FOMC members.

Other members are also speaking today and it is expected they will reiterate the message of price stability ie controlling inflation. This change in stance, focussing on inflation, from the Fed's initial response to the credit crisis of pumping liquidity into the market and cutting rates has seen the 10yr US Treasury yield rise back above 4% for the first time this year.

Also commenting on inflation was Trichet saying that the job of the central banks is to preserve medium term price stability and keep inflation expectations well anchored. No chance of a rate cut in the Eurozone soon!

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Wise Money asks if an ECB rate cut is wishful thinking

Prominent fears of stagflation (inflation and stagnation) appeared to contribute to the Sterling weakness against the US Dollar yesterday.

Not helping the GB Pound was the release of a Hometrack survey showing a fall in house prices in England and Wales for the eighth month running and a 40% year-on-year drop in April's mortgage approvals.

Across the pond the US Dollar experienced a lift following a report showing stronger than expected US new home sales data and a retreat in oil prices. This phase did not last long however as the EUR took the lead once again.

The US Dollar fell compared to the Yen and CHF following the FBI saying that a video will be posted soon urging Islamic militants to attack the West via biological, chemical and nuclear weapons.

Oil is the key at the moment for the greenback as they seem to move inversely in recent times. If we see a fall in oil prices inflation worries will quieten down and make investors believe the worst is over.

Recent data released in Europe gave reason for concern over the health and stability of its economy. The EUR suffered following a slump in French business confidence to a 2.5 year low and an unforeseen decrease in Germany's consumer morale for the month of June.

Investors are looking for action from the ECB and a change from its neutral perspective to dovish. However ECB members themselves declare this as "wishful thinking" and a different approach to its monetary policy is yet to be seen. Looking at the global economy market participants feel that the US has seen the worst of it and that Europe is only at the start of its economic slowdown.

The FED has adopted a very dovish tone since fears of a recession first appeared and tried to counter-act with rate cuts totalling 3.25 percentage points since September however with inflation now beginning to be the main focus the market will be looking for the Fed's next move to be an increase in rates.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Soros - We face the most serious recession of our lifetime

George Soros, the phenomenally successful billionaire hedge fund manager, has said that "we face the most serious recession of our lifetime".

In short, he made his feeling perfectly clear, by saying that the United States and Britain are facing a recession of a scale greater than the early - 1990s and greater even than the 1970s.

He pointed towards the 1970s dislocations when commenting that current market conditions are worse because of the implications of the house price decline, which there wasn't in the 1970s.

Soros, who warned of the dire consequences facing the American economy years ago, when the housing bubble was still inflating, said about the UK "House prices have risen over the years and are further away from sustainable levels than in practically any other country, in terms of house indebtedness and the relationship incomes. The slump may be more gentle that the US, but it will be more drawn out".

The dollar inched back towards one-month lows against a basket of currencies today, as oil prices were near record highs and the deteriorating U.S. economy.

Activity is expected to pick up today as investors return from long weekends in both the United States and Britain, with the market looking to oil prices and stocks for clues on the dollar's near-term direction.

Expectations of the US dollars longer term direction in particular against the euro, is that we see could it rise towards the end of the year, as Federal Reserve is done with interest-rate reductions and may raise borrowing costs next year.

The U.S. currency on April 22 reached a record low of $1.6019 per euro as the Fed decreased its benchmark rate seven times since September to 2 per-cent to spur economic growth. The dollar has plunged almost 44 percent against the euro since the start of 2002.

The Australian and New Zealand dollars rose on speculation the extra yields offered by the nations' bonds attracted investors. The Australian dollar traded near the highest level in 25 years, whilst the New Zealand dollar climbed for an eighth day, in its longest rally in 14 month.

Crude oil rose above $133 a barrel as a militant attack in Nigeria disrupted supplies and on speculation fuel subsidies in Asian countries will continue to spur demand.

Gold was little changed after gaining in the past two days as higher crude oil prices and the dollar's weakness against the euro bolstered demand for the precious metal as a hedge against inflation.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Bank of England- between a rock and a hard place.

Today we have the release of the Quarterly Inflation Report accompanied by the post release Question & Answer session.

In a normal market the combined effects of downward pressure on consumption, tumbling consumer confidence, high street sales falling 1.5% year on year, multi million Pound write-downs from the residential property sector, a softening of the holiday booking industry and the threat from the recently nationalised Northern Rock that the labour Government will not get "our" money back for a lot longer would suggest that any inflationary pressures would be subsiding.

Unfortunately that is not the case because inflation is rearing its ugly head. The strong output prices earlier in the week had set the stall and yesterday's CPI number came in at a shocking 3%.

Mervyn & the team must be getting very worried that they will have to write another letter to the Chancellor explaining why inflation is running above 3%.

We would hope that the Bank of England is looking at the bigger picture and the slowing economic environment will drag the inflationary threat lower over time which in turn means there is still the potential for lower interest rates with a Bank Rate of 4.50% still targeted in this cycle.

There was a proliferation of comment from 5 Fed members last night, including the Chairman Ben Bernanke. All followed the same theme of inflation concerns and the need for a stable Dollar, but each with their own nuances.

The most important of these additional comments in my view came from Fisher who stated that the Fed and the ECB were working together to ensure long-term confidence in the Dollar. The implications are that we have seen the top in EUR/USD for the foreseeable future at least (it topped out at just above 1.60 immediately following the last G7 meeting - the significance of which looks more important with each passing session).

The Foreign Exchange markets were reasonably quiet yesterday given the importance of the data and cable traded in a narrow 50 bp range for most of the day with even the much higher than expected UK CPI figure failing to drive it lower.

The Dollar's strength overnight has succeeded in pushing cable down to the 1.94 level but a look at Sterling's performance against other majors underlines the fact that this latest volatility is Dollar based.

The Inflation report at 10.30 followed by the German IFO at 11.00 will be the catalysts that mould the rates early on (a BoE stance as anticipated and a weak IFO could see Euro/GBP lower) and the US CPI data at 1.30 this afternoon will likely be the precursor to further Fed comment and a stronger Dollar later.

We also see UK claimant count rate/ jobless claims/ average earnings/ unemployment rate released. These should provide further evidence of the UK economic slowdown and as such be the Rock to inflation's Hard Place that the MPC finds itself between.

Ensuring that inflation remains a thorn in everyone's side, the oil price continued its inexorable rise reaching a new high above $127 per barrel following rumours of production being reduced. This after the IEA had cut their estimates of global oil demand for the rest of the year.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.