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Analysis of Market Economics

June 29th, 2007

USA - Inflation (specially core) faces a rising risk

By Rao

 

Situation in May’07

  • On a monthly basis Consumer prices rose by 0.61 % (0.65 % in Apr’07)
  • On an annual basis Consumer prices rose by  2.69 % p.a ( 2.57 % p.a in Apr’07)

 

  • On a monthly basis Producer prices rose by 1.21 % (0.97 % in Apr’07)
  • On an annual basis Producer prices rose by 4.09 % p.a ( 3.17 % p.a in Apr ’07)

 

  • On an annual basis Core Consumer prices rose by  2.20 % p.a ( 2.30 % p.a in Apr’07)
  • On an annual basis Core Producer prices rose by  1.58% p.a ( 1.51 % p.a in Apr’07)

 

Background

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Core CPI viz Fed rate ( click on image for a clearer visual)

 

The interest rate at 5.25% has helped in bringing down Core CPI.

 

 

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CPI viz Core CPI ( click on image for a clearer visual)

 

 

The direction of CPI tends to infuence the direction of Core CPI. CPI has been on a growth path since Oct’06. Core could follow.

 

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PPI viz CPI ( click on image for a clearer visual)

 

 

  • The Fed has in its statement said that it feels that that inflation has been moderate in the first half of the year. It obviously is looking at core inflation, since normal CPI and PPI have been on a strong rising trend.
  • PPI growth looks unlikely to be beyond 4.50% p.a - 5.00% p.a
  • However the persistent sharp growth in PPI could drag CPI up towards the 3.5% - 4.00% p.a area

..

 

Conclusion

Unless we see a clear drop in Producer prices, it is very likely that the Fed fears on inflation could once again become “elevated” ( i.e rate hike )

 

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Related links

USA : No change in Fed rate - concerns remain on inflation

 

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June 29th, 2007

USA : No change in Fed rate - concerns remain on inflation

By Rao

Situation

  • The Federal Open Market Committee ( FOMC ) met on June 27th 2007. The FOMC releases a statement after their meeting - reflecting the Interest rate decision and their thinking about the future.
  • Statements are standardized so that there is no room for a mis - understanding.
  • Comparing statements of the past - to the current statement can give us a clue on how the FOMC thinking is changing and in which direction they are pulling towards.
  • Have broken down and then compared the current statement released to the  statement made in the last meeting . Items in Bold  Italics highlight the differences in thinking.
  • The next FOMC meeting is on  August 7th 2007.. 

 


May 9th Fed Statement

June 28th Fed Statement

 What it means for the future of  interest rate

 
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5.25%. 

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5.25%. 

  
Economic growth slowed in the first part of this year     Economic growth appears to   have been moderate during the first half of this year
  • No Pressure on growth.
  • No interest rate drop 

 
Adjustment in the housing sector is ongoing    Adjustment in the housing sector is ongoing. 
  • Stabilization not happened as yet.
  • No interest rate drop 

Nevertheless, the economy seems likely to expand at a moderate pace over coming quarters

  The economy seems likely to  continue to expand at a moderate pace over coming quarters.

 
  • No interest rate drop
Core inflation remains somewhat elevated.  

Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated

  • No Interest rate hike in the immediate future. ( inflation needs to be watched)

Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.

 

     Moreover, the high level of     resource utilization has the potential to sustain those pressures. 
  • No interest rate hike
In these circumstances, the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected.  

In these circumstances, the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected.
  • Inflation concern exists.
  •  No Interest rate drop
Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.
  • Rates will not be changed in the next meeting

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Comments

  • The Feds primary concern remains inflation ( though they feel that it has moderated). As such rate changes cannot be expected in the next meeting to be held on August 7th 2007. Any sustained rise in inflation (need to observe inflation data in Jul’07 and Aug’07) could however trigger a rate hike.
  • The Fed does not seem have any fears that the current rates could act as an impediment to growth. As such it is not currently considering rate drops. Any change of such a stance would depend on the preliminary GDP data for Q2 2007 ( expected on July 27th 2007). The earliest communication of any change in stance (regarding growth fears)  would therefore happen in the August 7th meet.  

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USA - Inflation (specially core) faces a rising risk

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Posted in United States, Monetary Policy | Comment Here
June 29th, 2007

Indian Money rates : Situation normal…..

By Dheeraj

As we had predicted, Indian money market rates have retraced to saner levels after hitting ridiculous lows of 0.01% p.a. on a sustained basis for the past couple of weeks.

Overnight rates climbed to levels of 8.25%, higher than the central bank’s repo rate, the rate at which it infuses funds. No wonder the RBI received bids worth more than INR 100 bn under its daily lending facility available at the rate of 7.75%.

Rates are expected to remain firm, as the transfer of the stake in the State Bank of India from the RBI to the Central Government takes place today.

With the US Fed’s rate decision (No change in policy rates; some concerns expressed on inflation) now out of the way, focus of market participants shifts to RBI’s monetary policy review, due on July 24.

Personally, I do not forsee any change in policy rates in India at least for the time being. Things seem to be going the way policymakers would like to have it. Inflation readings are low enough, the relentless appreciation in the Indian rupee seems to have been halted for the time being, credit growth seems to be moderating and banks are now laying greater focus on credit quality.

Under these conditions, the RBI Governor may want to hold his horses for the time being. Of course, we have seen his penchant for surprises in the past. The market would therefore continue to remain wary.

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