Thursday, December 20, 2007

Macro Themes for a Thursday

* Central Bank Cross-Currents - Very interesting dynamics among the central banks. China is raising interest rates to fight inflation; the ECB is dismissing calls for lower rates also due to inflation concerns, but faces pressure to reduce rates in the face of economic slowdown. Inflation is on the rise in Brazil, where rates have been kept steady after a lengthy period of easing. The BOJ has refrained from raising rates due to signs of economic slowdown. The markets are anticipating a Fed interest rate cut on Jan. 30th (86% odds), but 10-yr yields have been staying above 4% due to inflation concerns in the U.S. Meanwhile, I'm looking to the commodity markets for indications of whether the economic slowdown meme might be trumping concerns over inflation.

* Currency Cross-Currents - As stocks have bounced from their November lows, we've also seen a dollar bounce vs. Yen and Euro despite those recent nasty inflation figures in the U.S. Ironically, in a global slowdown scenario--particularly one in which growth is more threatened in Japan and Europe than in the U.S. due, in part, to overseas credit concerns--the dollar could wind up as a safer haven despite the multitude of dollar concerns. A U.S. slowdown appears to be hurting Asian issues, adding to those international credit concerns. Concerns over an overvalued Euro could lead to renewed interest in dollar-based assets.

* Misunderstanding the Fed and ECB: A Dash of Insight has several excellent posts on how investors lack an understanding of LIBOR and how the Fed and ECB are not out of touch with financial markets, despite concerns over the pace of their response to credit concerns.

* Tough to Be Rich - Barry Ritholtz chronicles the high cost of living well, as inflation hits the upper end of the economic spectrum.