The US dollar has hit yet [I]another[/I] record low of 1.5687 against the euro amidst a lethal dose of economic data and news that a liquidity crisis at Bear Stearns requires the help of JP Morgan and the Federal Reserve Bank of New York. The dollar’s slide has also taken the currency down to parity with the Swiss franc for the first time ever, while the greenback continues to hover near the 100 yen mark.
Though inflation trends in the world’s largest are still running hot, the impact of modestly cooler pressures may be more meaningful for monetary policy and market forecasts than a sharp rally. Economists were expecting annualized, headline inflation to hold steady at a 4.3 percent clip through February and the core reading to tick lower to 2.4 percent. However, what crossed the wires was weaker than what the market was prepared for on both fronts. The broadest measure of price growth cooled to 4.0 percent to its coolest rate of expansion in four months. Excluding the measurement’s volatile components, inflation actually slipped more quickly than expected to a 2.3 percent clip - also matching a four-month low. Looking a little closer into the Labor Department’s statistics revealed notable dips in prices for energy, autos, personal computers and apparel. It has been well known that the primary drivers of headline CPI have been the volatile mix of energy and food prices. While the cost of food sustained its rise, energy prices finally slipped 0.5 percent from January with gasoline dropping 2.0 percent - an unusual turn of events considering the records in oil. Put into context, this pull back in inflation may have a profound effect on the Federal Reserve’s policy meeting next Wednesday.
Meanwhile, US consumer confidence, as measured by the University of Michigan, continued to whither in March as the preliminary reading of the index fell to a 16-year low of 70.5 from 70.8. This figure was actually better than expected, as a breakdown of the index shows that consumers’ view of economic conditions actually improved. Nevertheless, the outlook on the economy remains dismal while inflation expectations have surged to 4.5 percent in the year ahead, versus 3.6 percent last month, amidst the rapid appreciation of commodities like oil and gold.
After the Fed announced its TSLF program (aimed at injecting liquidity in the struggling credit markets and accepting mortgage backed securities as collateral), speculation of a 75 bp rate cut eased as many believed that this effort at correcting the markets would stand in for further deep cuts. However, with inflation cooling despite the Fed’s cumulative 225 bps of easing since September, the Fed may have greater scope to take a two tier approach at finally correcting credit markets through additional liquidity and a 75 bp rate cut.
Looking at price action in the equity markets, it’s fairly clear that investor sentiment is taking a beating on news the Bear Stearns news, as JP Morgan Chase & Co. and the Federal Reserve Bank of New York have joined forces to provide the firm with secured funding for up to 28 days. Bear Stearns CEO Alan Schwartz said in a release, “…our liquidity position in the last 24 hours had significantly deteriorated. We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations.” The DJIA fell as much as 300 points shortly after the announcement, though the index is now trading down 156 points at 11,989 at the time of writing, which does not bode well for carry trades like USD/JPY. However, the pair is stubbornly holding above the 100 mark and poses the question: Is That the Line in the Sand for Japanese Policy Makers?
[B]Written by Terri Belkas and John Kicklighter, Currency Analyst for DailyFX.com[/B]