httpvh://www.youtube.com/watch?v=JHZ8EeD04YE
Fed Reserve-speak prompts inflationary pressures.
• FOMC pitches inflationary pressures.
• Japanese tragedy dominates Japanese & energy stocks.
• AU, EU central bank chiefs in stark contrast over belt tightening.
The Federal Reserve has sought to undermine concerns regarding a fledgling recovery however didn’t remove the option of extended asset purchases post June – known as Quantitative Easing. The Federal Open Market Committee kept interest rates on hold (.25%) while noting that the Asian and Middle East-led inflationary pressures via food and oil have been combined with marginally improved economic conditions. Better conditions would be a precursor for tighter monetary policy going forward and the US economic data has had some positive data recently, namely Nonfarm Payrolls (192K). Broadly speaking however the data this week highlights how the economic powerhouse has significant soft spots, while the comments out of the FOMC that their economy is on a “firmer footing” is also a tacit endorsement of recent Quantitative Easing.
The tragic events in Japan have had repercussions for global markets. The magnitude 9 earthquake and tsunami brought devastation to the Japanese people while posing risk to their economic recovery and global risk appetite (S&P500-1.12%). As a result of Friday’s disaster and aftershocks; Japanese stocks plummeted, many energy stocks fell as did stocks exposed to the development of nuclear energy namely GE. The fires at the Fukushima reactor have led to radiation leaks while also prompting the fear of a meltdown should the reactor not be sufficiently cooled by sea water. The probability of a nuclear disaster is slim however and the immediate area has been evacuated to mitigate further contamination.
ECB president Jean Claude Trichet noted that inflationary pressures may force their hand in tightening the EU monetary policy belt. This belt tightening is despite debt downgrades in peripheral Europe, including Spain this week by Moody’s and the limited amount of fiscal amalgamation by member countries. Locally, the RBA continued this week’s central bank theme by pouring cold water on its 2009, 2010 stance of spruiking the local unit. They mentioned in the meeting meetings that reduced consumer borrowing had been a “welcome development” and that the “mildly restrictive stance of policy continued to be appropriate”. The RBA’s local influence in 2009, 2010 was a key reason the Aussie was able to put on significant weight during that period and February’s meeting minutes suggest a more tepid 2011. Local data this week was mixed, while China’s Trade Deficit (-7.3B) announcement last week pushed the Aussie lower.
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