Friday, February 19, 2010

Inflation Falls The Most Since 1982

My post is a little late this am, as I was glued to that train wreck known as Tiger Woods' press conference. But I digress-- The market is acting pretty resilient this morning in the face of the surprise interest rate hike by the Fed. The Fed announced last night that it was hiking the discount rate by 25 bps to 0.75%.

The move seems mostly symbolic, and the Fed made sure to say that it was not a signal for any change in monetary policy towards a tighter stance. Rather, it seems more of an indication that the financial system is on more stable ground. But I don't think it speeds up the time table for the Fed to raise the fed funds rate. I still think they are on hold all year.

The market reacted negatively to the news last night, with the futures dropping quickly. Asian markets also reacted negatively to the news, and were lower across the board. The dollar soared on the news, hitting 8-month highs, and weighing on commodity prices. But by this morning, the news had time to be digested, and while the market was slightly lower earlier, it has since climbed back into positive territory.

This morning's inflation report also helped improve sentiment. The core CPI actually fell -0.1% in January, marking the first time consumer prices have dropped like this since December 1982. Wasn't that the start of a new bull market? I have said for a while now that inflation should remain subdued with all of the excess capacity in the economy. I think the inflation hawks only seem to be looking at the few prices out there that are rising (i.e.- healthcare).

Trading comment: The market acts well so far, and sentiment is still heavily on the bearish side. So despite the market moving back to overbought, I think it should hang in here well.


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