16 10 07 Bernanke Shock
Did Bernanke rain on Wall Street's day again? A number of comments came out of his speech last night with the main stream media seeming to pick up on 'possible additional Fed rate cuts' as a good lead. We're not quite sure how they put that together, except perhaps as a result of most interviews being with mortgage lenders or others associated with that industry who have a vested interest in the Fed doing just that. However, what probably has Wall St. a bit more concerned is Bernanke's observation that while the broader financial markets have appeared to stabilize, those directly related to housing are still in poor shape. No shock there as the ills in the housing market and the associated lending/derivatives markets will only be fixed by the passage of time, not cheaper overnight rates. In addition, Bernanke made a very unsavory comment - that the Fed may in fact need to take back the 50bp cut from last month should inflation remain elevated or increase.With energy prices remaining high (oil at a record), gold over $750, grains near record highs or at least much higher than the prior year and most metals in the same boat it is no wonder the Fed remains concerned about inflation. In addition, the producer price index that was reported last week showed a large jump in the core crude goods component. That is inflation down the road. Labor costs as reported in the monthly NFP data were also elevated.
Last, the very recent trend in the stock market has been to buy US companies which have large exports, especially to the Eurozone. However, with ECB retaining a firm policy stance and the IMF indicating a slowdown in European growth is a distinct possibility, Wall Street may find themselves holding fools gold once again.
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