Market Talk

Obviously, Japan is the big story, the very big story. But there’s something else worth pointing out today: inflation expectations here in the U.S. In short, they are rising, maybe faster than the Fed expected, and that may create problems for the central bank that it wasn’t exactly expecting to face this soon.

This is perhaps best illustrated by the story of William Dudley, the head of the New York Fed, who took a trip across the East River this morning to speak to the Queens Chamber of Commerce. You can read about his prepared remarks in this WSJ write-up by Newswires’ Michael Derby. But the really interesting part occurred when he took questions from the audience.  Derby elaborates:

New York Fed President Dudley just faced down a Queens, N.Y., audience that was having a hard time buying his contention inflation is low and likely to stay that way.

He was challenged by one audience member, who said, “when was the last time, sir, you went grocery shopping?” Dudley responded “I certainly acknowledge food prices have gone up.” But he added some prices are lower and he noted “today you can buy an iPad 2 that costs the same as an iPad 1, that’s twice as powerful,” as an example of favorable price dynamics.

His example was greeted with widespread grumbling in the audience, in an unusual display of discontent at a Fed speech. Dudley’s struggle is a harbinger of the trouble policymakers are likely to face over coming months, amid the good chance food and energy prices are on a sustained move higher.

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US stocks rise, as this morning’s data batch presents a mixed picture, and a key Fed official signals QE2 is on the way. Maybe. Sort of. It depends.

DJIA rises 42 to 10830, still down about 0.3% on the week. That snaps a four-week winning streak. S&P 500 gains 5 to 1146 (the 1150 level remains an important headwind here; the day’s high was 1150.30,) Nasdaq Comp adds 2 to 2371. It’s another good day for the cool kids, of course. Euro pierces $1.37 and is approaching $1.38. Gold hits another record, it’s set one in 11 of the past 14 sessions, currently at $1.318.70. Treasurys ease, but the 10-year yield is still at only 2.51%.

This morning’s data come in “better than expected,” but the picture they paint is decidedly mixed. ISM manufacturing index, for example, eases, with new orders a notable slider. We previously explained what we think of the income report.

So when NY Fed’s William Dudley terms the recovery “wholly unsatisfactory,” you know he’s not just whistling Dixie.

Elsewhere, the SEC and CFTC released their much-ballyhooed flash-crash report. The big takeaway? The bots did it. Thanks for sharing.

Most prominent feature in US premarket is the hammering taken by the US dollar. ICE USD index recently down 0.8% at 79.79, lowest levels in six months.

This is no flight from safety into risk, folks (gold and Treasurys are soaring), just the harsh reaffirmation that the Fed’s course of action remains one that isn’t conducive to a strong dollar.

FOMC yesterday exposed it’s concerns about deflation all too clearly, though it’s debateable how effective “additional accommodation” will be in warding it off, or even in supporting the recovery.

No notable data on the calendar today. Euro jumps past to $1.34 on USD weakness, up to $1.3422 now, though European stocks are down. S&P futures down 0.80, DJ futures down 4. Ten-year strong, yield back down to 2.54%.

Former IMF chief economist Simon Johnson picks up on some comments from NY Fed President William Dudley that were released during the 4th of July weekend and may’ve fallen under the radar.

Dudley says the Fed can pop or prevent asset bubbles from developing. According to Washington Post:

The Fed’s view has been that bubbles can be identified only in hindsight, and that all the central bank can do is prepare to clean up after they burst. The current crisis shows that policy is mistaken, Dudley said.

“Asset bubbles may not be that hard to identify,” he said. “This crisis has demonstrated that the cost of waiting to clean up asset bubbles after they burst can be very high.”

Nevertheless, Johnson remains skeptical.

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