Archive - Apr 7, 2011 - Story

• China Inflation May Hit 6%, No End to Tightening (China Daily)
• Portugal Bailout May Reach $129 Billion (WSJ)
• Brazil Takes Fresh ‘Currency War’ Action (FT)
• Obama Says Meeting ‘Narrowed the Issues’ on Budget Impasse (Bloomberg)
• Government Shutdown Threatens 800,000 As Obama Seeks Solution (Bloomberg)
• Ireland will need another bailout, says former IMF director (Guardian)
• Japan to Head Off Hydrogen Blast (WSJ)
• U.S., Italy Consider Arming Rebels to Speed Qaddafi Ouster (Bloomberg)
• European banks in further capital calls (FT)

The UN's Food and Agriculture Organization, whose January print was the catalyst for us to revolutionary food riots ahead of time, released its March food price update - "the Food Price Index (FFPI) averaged 230 points in March  2011, down  2.9 percent from its peak in February, but still 37 percent above March last year. International prices of oils and sugar contracted the most, followed by cereals. By contrast, dairy and meat prices were up." So in essence the drop in the volatile energy component has been transitory, courtesy of WTI and Brent now at 30 month high, and the April number will be yet another surge. Reuters agrees: "new increases are in sight as demand grows and supplies tighten, the UN Food and Agriculture Organisation said. Rising food prices have climbed to the top of the
international political agenda after contributing to protests that
toppled the rulers of Tunisia and Egypt earlier this year, with unrest
spreading across North Africa and the Middle East." The spin: ""The decrease in the overall index this month brings some welcome respite from the steady increases seen over the last eight months," David Hallam, director of FAO's Trade and Market Division, said in a statement. "But it would be premature to conclude that this is a reversal of the upward trend," he said." It isn't. And with loose monetary policy expected out of the US for as wide as the eye can see, little if anything will change for a long time.

Gold’s two consecutive days of nominal record highs have seen some profit taking as oil is flat, the dollar is marginally higher and the euro has fallen. The ECB’s 0.25 % interest rate hike may lead to further profit taking today but rising interest rates in an increasingly inflationary environment will be positive for gold as it was from 1965 to 1981 (see charts below). It is only when real interest rates turn positive (nominal interest rates are again above the nominal rate of inflation) that gold and silver’s secular bull markets may be challenged. Inflation in the eurozone is 2.6%. Today’s interest rate rise will leave eurozone interest rates at 1.25% well below the 2.6% rate of inflation meaning that savers continue to lose out due to very low yielding deposits. Negative real interest rates will likely lead to precious metal prices continuing to rise or rather very low yielding fiat currencies falling in value versus non yielding finite gold. Rising interest rates are bullish for gold also as they may see the primary asset classes of equities, bonds and property come under pressure again.

Update 2: EURUSD now rising gradually as JC Trichet language in conference more hawkish than expected.

Update: ECB Hikes by 25 bps as expected - No market reaction whatsoever: all telegraphed.

Previously

Today at 7:45am EDT the ECB's Governing Council, which convened at 3 am, will announce its interest rate decision, which is expected by 76 out of 80 polled economists to be a 0.25% hike to the current rate of 1.00%. This will be the first rate rise since July 2008. Ironically, the decision to curb inflation will come hours after Portugal demanded a bailout: a development which will only be intensified by an interest rate hike. Zero Hedge will follow and announce the decision in real time, while the press conference following the decision which will provide clues about Trichet's future rate strategy can be seen here.

With all eyes on Europe today, where the BOE just announced it is keeping rates at 0.50% as expected, the events in the US are jobless claims and February consumer credit.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 07/04/11