Buffett: Bull Bear Bernanke=Stagflation!

The USD$ is weaker in the O/N trading session. Currently it is lower against 12 of the 16 most actively traded currencies in a ‘tight’ trading range, as markets digest the Fed’s comments.

No surprises by Bernanke and Co. yesterday afternoon. As expected they held Fed Funds at 2%. Fed officials had been rather transparent with their intentions to keep rates unchanged, specifically citing the dangers of heightened inflation. The vote to keep Fed Funds unchanged was not unanimous (interestingly Fisher-who voted for a ‘no’ change in April wanted to hike-he had been the most hawkish of late). The accompanying communiqué noted that inflation risks have increased. However, the majority of the FOMC members continued to look at the downside risks for growth (disappointing GDP numbers), preferring stable rates for the time being. Hiking rates at this time would probably add to the problems of further economic contraction. Again, the Fed highlighted the importance of its ‘go to’ variable, the Consumer. They said that ‘recent information indicated that overall economic activity continues to expand, partly reflecting some firming in household spending. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters’ (longer than was initially thought). Labor and manufacturing data of late has been weak. Housing data continues to show that the market has ways to fall before recovering. Conclusion, talking rate hike is ‘premature’. Policy makers expect inflation to moderate later this year and next year. ‘The continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high’ (could be interpreted as being more hawkish). ‘Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. ‘The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability’. The initial reaction to the Fed statement was a USD$ rally, but traders were quick to realize that although there was a ‘mild’ focus placed on inflation, the statement was not nearly as hawkish as the market had been anticipating it would be. Net result, USD$ went into freefall!

Also yesterday, US durable goods orders remained unchanged last month, as both the consumer and companies continued to trim their investment plans. This is further evidence that the US economy may keep slowing for this quarter. April’s orders were also revised down (-1%) while core-goods orders (ex-transportation equipment) declined -0.9%, the first drop in 3-months. Analysts insist that that the domestic slowdown, which has been ‘egged on’ by the housing debacle and weaker consumer spending, will continue to offset the advantages of record exports (which has been influenced by a weaker USD$ policy that no one will admit too). Last weeks reports from both the New York and Philly Fed reserves showed that manufacturing in the said regions are weakening at a faster pace. Not a pretty picture entering into the 2nd half of the year. The real estate slump continues as the US New Home sales data dropped -2.5%, m/m for May (512k vs. 525k). One can expect the stricter borrowing practices, falling house prices to keep potential buyers away from the market in the medium term. Shifting inventories remains a priority.

The US $ currently is lower against the EUR +0.10%, GBP +0.20%, CHF +0.16% and higher JPY -0.08%. The commodity currencies are a tad weaker this morning, CAD -0.02% and AUD -0.02%. The loonie remains contained in a tight trading range despite the Fed holding rates steady yesterday and citing somewhat diminished risks to growth, which can only be a plus for the Canadian economy (over 70% of Canadian exports head south of the border). The change in US monetary policy will reduce pressure on the BOC to cut its borrowing cost after standing pat earlier in the month. Analysts and traders are pricing in a move from governor Carney in Oct. Canadian fundamentals are not that ‘hot’ either. Expect commodity prices to dictate short term movements for now. The AUD$ remains better bid (0.9597) as traders continue to speculate a ‘no’ rate movement by the Fed any time soon, allowing the currency to maintain its yield advantage (7.25%).

Crude is lower O/N ($134.52 down -3c). The weekly EIA report again surprised the market. The data showed that inventories increased for the first time in nearly two months. Stocks rose +803k barrels to 301.8m barrels last week. The market had expected a routinely decline of around -1.1m barrels. The U.A.E (OPEC’s 3rd largest producer) jumped on the band wagon and sided with the Saudis earlier announcement and said that they would boost supplies to the market if needed. Currently they pump +2.65m barrels per day, but, insist that they have spare capacity. Other OPEC members believe that the market is well supplied for now, and it’s not necessarily a supply issue but a refinery process concern. Private reports from Credit card companies indicate that gas purchases by consumers have declined for the 9th week in a row in the US, indicating declining demand. Maybe we will get less price gauging at the pumps!. The IEA produced a humorous report yesterday, believing that oil prices will slip back to the $70 mark by 2015 as other production centers come on line (Azerbaijan, Canada, Brazil and Kazakhstan) and then proceed north to $113 by 2030 as supplies tighten. What a prediction, they cannot even get m/m prices in the same ball park now. Geo-political concerns in Iran and Nigeria will continue to influence the market in the short term. Market perception believes that high-quality crude has been taken off the market because of the problems in Nigeria (who are currently back on line pumping); while the Saudis are offering barrels that are most likely of inferior quality, had kept prices elevated. Gold came under pressure yesterday ($892) after energy costs aggressively retreated, encouraging investors to reduce their demand for the ‘yellow metal’ as a hedge against inflation. The metal has managed to rally in the London session as the greenback slumps vs. the EUR.

The Nikkei closed at 13,822 down -8. The DAX index in Europe was at 6,548 down -69; the FTSE (UK) currently is 5,611 down -55. The early call for the open of key US indices is lower. Yields of the US 10-year bond backed up 4bp yesterday (4.13%) and are little changed O/N. Treasury prices fell as the Fed left borrowing costs unchanged, but the accompanying ‘hawkish’ statement provided traders some incentive to pare recent holdings.

Yesterday, the ‘Oracle of Omaha’ Buffett participating in a lunch time interview had some harsh words for ‘Gentle Ben’. When he was pressed to comment on borrowing costs, he ‘jokingly’ stated (yeah right) that if he was Bernanke, he would tender his resignation. The Guru foresees the USD$ getting weaker over time, and that the oil price rise is not ‘speculation but supply and demand issues. He warns that from a consumer’s perspective, the economic weakening is getting worse and that growth is slowing while inflation is really heating up. One has to respect his track record; the man has over $35b to spend! Remember what a mess the US economy was in entering last July, yet Bernanke waited until Sept. to do anything, when things were a whole lot worse. His actions to date……

No change in Aug, 2007.
-50 in Sept. 2007
-25 in Oct. 2007
-25 in Dec. 2007
-75 in Jan 2008(Panic cut over the SocGen debacle)
-50 a week later
-75 in Mar. 2008
-25 in April
No change in June

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