With US economy improving as the data suggests, Fed has once again (as always) come into the limelight, though this time expectations are real high. With retail sales picking up (may be due to festive season and special sales like Black Friday sales), NFP data improving (though there is still a question mark on it as stated in the last article) it is becoming certain that US economy has bottomed out and has started on the path of recovery. Hence as expected, markets around the world eagerly awaited FOMC rate announcement for any signs of increase in interest rates. But Fed playing smart underplayed the whole hysteria about rate hike.
Though of course, it has given signals that they are going to start reversing the stimulus packages Feb1 2010 onwards, but the rates are going to remain low for an “extended period”. There is nothing wrong with that stance as such, for the fact that policies can’t be changed based on ‘one time events’ or ‘knee-jerk reactions’. All the improvements have to be viewed over a period of time to really take some action on it.
US economy for the first time, as far as I think, is trying to form a solid foundation to avoid any such ‘calamities’ in future, which is quite sensible as they have an opportunity to do it now. With a further decrease in unemployment, increase in consumer spending and confidence and of course the main cause for this cyclone, the housing market picking up, then I think that Fed will take a strong stance on hike in interest rates. As of now Fed doesn’t want to disturb the momentum, and continue monitoring the entire situation. Just like a good doctor (Fed), the patient (economy) has been shifted from Coma to ICU and is now under observation. Slowly and slowly, the support drugs will be removed one by one and then the condition of the patient will be observed.
But as Dow Theory suggests (if I am not wrong) all the news is factored in the market even prior to it being released. The price discovered averages everything. So as soon, as NFP data was released, we saw sudden Dollar strength and since then all global currencies have not been able to recover at all. Post FOMC meet it has been even deadlier. EUR has fallen almost 8 big figures from its top of 1.51. GBP gave early signs and has been hovering in the range of 1.61-6200. CHF, AUD all have fallen considerably after creating 14 months high against USD. So as we see, all the expectations have already been factored in the market. So we will to observe that for how long this Dollar strength remains as until Feb 2010, there are no signs of rate hike. So we can expect a rate hike only in the 2nd half of 2010. Are we going to witness, another bout, may be the last, of dollar weakness.
But one thing that market is not closely watching at present is Commodities. A hell amount of USD went into commodities, be it crude, gold, silver etc. Commodities went soaring into the skies, creating new highs almost on a daily basis, in turn creating a ‘Commodity Bubble’ of sorts. But now with Dollar strength in place, investors are squaring their positions and moving back to USD. So can we expect a crash in commodities, bursting the so formed bubble? We have already seen a fall in crude from $85+ levels to $68. Similarly with gold, it has fallen from levels of $1200+ to $1100 levels. So can we expect input prices to go down and over all reduction in prices of goods, making them cheaper and helping in increasing consumer spending?
We will have to wait and see how things pan out in next few months to take a fresh call on the entire situation.