Bullion prices fell to five-week lows earlier on Thursday, touching $863.80 in the wake of early morning fresh gains in the US dollar and an additional slippage in oil prices. The dollar rose to 73.75 on the index as expectations that the ECB will stand pat once again emboldened currency traders to favor the greenback now that it has received explicit support from Dr. Bernanke. The BOE stood firm on its rates at 5% so there was nothing new there.
What was new on the day (and there was plenty), came from Messrs. Trichet, Lacker, and Plosser. The content and succession of their statements over the course of the day sent various markets into various directions all at once. While a number of overseas analysts did not see the ECB moving away from its current rate policy until perhaps a year from now, Mr. Trichet popped the first surprise of the morning, by suggesting that as a matter of fact, the ECB might just raise rates come July, in an inflation-fighting effort.
We wrote this morning that we are not so sure on that one (the ECB not doing anything for a year) not because we knew what Mr. T was going to say, but because we had felt that the ECB's anti-inflationary stance was made very clear for several weeks now. All that lacked was concrete action. Now, that might come too. Shortly after he spoke, the euro picked up steam, the dollar headed south, and gold cut some $10 off its early losses. Why, even oil managed a big rise on the day.
Then came the words of the Fed's Mr. Lacker, and they basically echoed the Bernanke word shot heard 'round the (trading room) world the other day. Following his words, the markets started to price in not only a 1/4 point hike for this month, but reports of bets for a 1/2 point raise started to filter in as well. The dollar bounced, gold fell again, and the day turned hectic for wrong-way bettors. The only market that appeared to look inward was the stock market, which rose over 130 points, and stayed up on declining jobless claims and better retail sales.
Meanwhile, Philly Fed Pres. Mr. Plosser deftly deflected a dollar intervention question by replying that the Fed (typically) does not intervene. Any such decision is made by the Treasury alone. Both Messrs. Lacker and Plosser underscored the importance of (the Fed) not making a habit of rescuing failing institutions by lending indiscriminately to them when trouble strikes. In effect, they want the Fed to set limits as to how and why it might intervene in crises and de facto allow some firms to fail so as not to get Wall Street into the false sense of security that even if it takes crazy risks the Fed will be there to bail it out. Both men saw potentially larger crises down the road if the moral hazard issue was not nipped in the bud. By the time the three statements were beginning to be digested, we were tracking the following new and significantly changed values around 3 PM New York time:
Gold down only $2.40 at $876.10, silver up 33 cents at $17.13, platinum up $15 at $2006, palladium down $2 at $422, crude oil up $4.65 at $126.95 and the US dollar down .46 at 73.02 on the index.
For your evening's reading pleasure, here are some excerpts from the recent statements by the four wise men. We could add Mr. Fisher's words from last week, but he said the same thing only more directly. See if they help you make up your mind as to what to buy or sell next any better than they did the confused trading crowd today. Then, just like looking for Waldo, see if you can spot the striking similarities in their jawboning.
Mr. Bernanke, on Tuesday and on Wednesday:
Some indicators of longer-term inflation expectations have risen in recent months, which is a significant concern for the Federal Reserve. We will need to monitor that situation closely. We recognize that keeping longer-term inflation expectations well anchored is essential to achieving the goal of low and stable inflation. Maintaining confidence in the Fed's commitment to price stability remains a top priority as the central bank navigates the current complex situation. We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations. For now, policy seems well positioned to promote moderate growth and price stability over time.
Mr. Trichet, today:
'The Governing Council [of the ECB] is monitoring very closely all developments. It is in a state of heightened alertness. We considered that it is not excluded that, after having carefully examined the situation, we could decide to move our rates for a small amount in our next meeting in order to secure the solid anchoring of inflation expectations, taking into account the situation. I don't say it is certain. I say it is possible. It is our strong determination to secure a firm anchoring of medium- and long-term inflation expectations in line with price stability.
Mr. Lacker, today:
As time has gone on, that risk of a sharper contraction has definitely receded in my mind. At the same time ... overall inflation has come in uncomfortably high. And so I think we are going to have some challenges going forward if overall inflation doesn't moderate in the months ahead. If there is a risk of inflation expectations rising ``significantly, we need to shade policy higher than we otherwise would.''
Mr. Plosser, today:
The only credible way to limit expectations of future lending is to incur the risk of short-run disruptions to financial markets by disappointing expectations and by not lending as freely as before.
By the sounds of the above, both sides are prepared to pull the rate hike trigger. It may be a question of who does so first and what the catalyst to such a move will be. For the Fed, the time between tomorrow's non-farm payroll and unemployment numbers and its next meeting on the 24th could be testing time for its verbal dollar support. After that, it is down to calling the Treasury. Oh, wait, it acts alone.
Stay tuned for Friday's sure to be exciting developments.