Financial Sense   Home  l  Market Monitor  l  Market WrapUp  l  Storm Watch  l  About Us  l  Contact Us

MARKETS EASE INTO HOLIDAY WEEKEND

Market volumes and volatility are nearly non-existent so far today in a very quiet session ahead of the long holiday weekend. The Dow and NASDAQ have been hovering in positive territory, roughly 12 points above yesterday’s close, Treasury notes and bonds are exactly at breakeven, the US dollar is 0.2% lower just below 83 on the dollar index, and spot gold has been flat-lined at $620.00 with spot silver literally flat-lined at $12.47. President Bush has been speaking on CNBC for the last hour or so…mostly propaganda on Iraq with little news for the financial markets. Mr. Bush is showcased on the financial news channel to promote his agenda. He knows he is swimming upstream with the new Congress. Two of the biggest points of difference between the President and Congress are how to deal with our growing trade imbalances with China and our need to devalue the dollar versus the yuan.

Last week Treasury Secretary Henry Paulson and Chairman of the Federal Reserve Ben Bernanke (leaders of our financial “Dream Team”) went to China to work on trade and currency reform. On face value it appears they came back empty-handed, except for whatever they may have agreed to behind closed doors. When the Dream Team returned, the headlines on Monday stated, “U.S. Current Account Deficit Widens to Record $225.6 Bln.” Then on Tuesday we got a surprise with higher than expected inflation in the Producer Price Index. Yesterday Mr. Paulson said China is not a currency manipulator, and now some of the Democrats in Congress and labor unions are threatening to enact punitive measures designed to pressure China.

Paulson Is Attacked for Softer Stance on Yuan Policy

Dec 20 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson is heading for a confrontation on China with the new Democratic- controlled Congress after his department softened its criticism of the country's currency policy.

Lawmakers condemned the Treasury for failing to label China a currency manipulator in its semi-annual foreign-exchange report yesterday and vowed to call Paulson to Capitol Hill to question him on the decision. Unions and manufacturers also criticized the Treasury report, which conceded China's policy of limiting gains in the yuan is a distortion.

From a separate Bloomberg article:

Paulson's hands are tied when it comes to ways to encourage China to let appreciation accelerate, Dresdner's Foster said.

"I can't see that he has too many options," Foster said. "The U.S. needs other people on board and doesn't want China actively working against them" in geopolitical situations. The U.S. needs China to help persuade North Korea to dismantle its nuclear program, he said.

I have searched to find more concrete facts of what was accomplished during the negotiations in China. There isn’t much information on any solid agreements, so all we can do is speculate. Probably the most accurate comments come from Oklahoma Republican, Tom Coburn:

"Rather than come home and state the obvious, I think what they are doing is giving them six months," said Tom Coburn, a Republican from Oklahoma who accompanied Senators Charles Schumer and Lindsey Graham on a trip to Beijing in March. "Nobody knows what private assurances were made behind closed doors."

Weekly Reports

LONDON, Dec 20 (Reuters) - Oil prices held above $63 on Wednesday after U.S. official data showed a drop in crude inventories, adding to perception that the high fuel stock levels reached in the third quarter have been reversed.

Platts was expecting a drawdown of crude oil inventories of 1.7 million barrels, but the Energy Department reported a much bigger than expected decline of 6.3 million barrels. Mild weather has tempered the gains for energy products, but the winter is almost upon us. (In fact, in Northern Colorado today we are getting what could almost be considered a blizzard with heavy snow and wind…very cold!) I expect crude to migrate back toward the $65 to $70 range in the next couple months.

In other news, the Mortgage Bankers Association said their applications index was lower by 10.2%, with the purchase index lower by 5.9% and the re-finance index lower by 14.6%. Thirty-year fixed rate mortgages moved eight basis points higher to 6.10%, which obviously slowed the re-financing activity from two weeks ago.

The housing market could sure use some relief from lower mortgage rates, but I’m not so sure rates will get much softer. The PPI report yesterday sent up some warning flags on inflation, and note that it comes at a time when oil prices have been down. What happens to the PPI number when oil moves $10 higher? We have inflation in the pipelines because governments around the globe continue to increase the supply of fiat funny-money faster than the economies are growing. If you are curious to see more detail on the growth of money supply, please check Jim Puplava’s most recent Storm Watch Update. Here is a very brief excerpt from Jim’s article:

PANDORA'S BOX HAS BEEN OPENED

The Federal Reserve will be hard-pressed to lower interest rates in the face of rising inflation and interest rate increases coming from abroad. Check the comments yesterday from Dallas Fed President Richard Fisher:

Fisher Says Rate Rise May Be Needed to Slow Inflation

Dec. 19 (Bloomberg) -- Inflation is a greater risk to the economy than slower growth, and the Federal Reserve may need to raise interest rates if price increases don't subside, Federal Reserve Bank of Dallas President Richard Fisher said.

"The risk of unacceptably high inflation still outweighs the risk of substandard economic growth," Fisher said today in the text of a speech to the Rotary Club of Longview, Texas. With inflation "too high," Fisher said he would "have no choice but to advocate tightening monetary policy further if inflation does not ratchet downward."

Now combine the comments from our own Fed Governor with the comments from Mr. Trichet out of the Eurozone:

Dec. 20 (Bloomberg) -- The euro traded near a record high against the yen as European Central Bank President Jean-Claude Trichet said he expects faster inflation in 2007.

Policy makers need to take ``firm'' action to keep prices stable because growth in the 12 nations sharing the single currency may push up wages more than expected, Trichet told the European Parliament in Brussels. Traders expect the bank to lift borrowing costs at least once next year, and today they added to bets on a second increase, interest-rate futures show.

"You have to continue to buy the euro against the yen," said Paresh Upadhyaya, who helps manage $29 billion in currency assets at Putnam Investments in Boston. "The ECB is likely to take rates higher early next year."

Upcoming Economic Calendar

Between now and the end of the year there are really only four more days that will have much in the way of economic reports. Thin trading and year-end window dressing should get us through the next week or so. The upcoming reports are as follows:

Very little has changed in the markets since my opening comments. The broad stock indexes are still a few points to the positive side and bond prices haven’t moved at all. The markets are quiet, and now is the time to make any final preparations for the long weekend ahead.

It’s time to celebrate the biggest birthday party of the year!!

May you be blessed with a peaceful and happy Christmas Day!

Mike Hartman

Home  l  Broadcast  l  Market Monitor  l  Storm Watch  l  Sitemap  l  About Us  l  Contact Us