The US dollar fell to a record low as fresh economic data unveiled growing inflationary pressures for the slowing economy, with the Fed adding to the frustration as Vice-Chairman Kohn stated that he does not “expect the recent elevated inflation rates to persist," and went further to say that “the adverse dynamics of the financial markets and the economy have presented the greater threat to economic welfare in the United States." The mounting pressures caused the US dollar to buckle against all of its major currency pairs, with the Canadian dollar and the Swiss Franc taking the lead. Against its European counterparts, the Euro rose just shy of $1.50 as the German IFO survey showed a surprising increase in business confidence, with the Pound Sterling following amid a fall in business investments and retail sales. The commodity currencies also posted gains against the US dollar as oil traded over $100 a barrel with gold prices rebounding from yesterday’s decline, while the Yen picked up as the securities markets continued yesterday’s advances, stoking investors to increase their positions in carry trades.
As the Fed holds their aggressive stance in fostering economic growth, inflationary pressures continued to surge as the Producer Price index hit a 26 year high due to the increasing cost of energy and food. The Producer Price index rose 7.4 percent for the year, while the Producer Price index excluding Food & Energy increased by 2.3 percent, spurring concerns that the US economy may face a period of stagflation. The home price indices also amplified the growing economic concerns for the US as home prices fell the most in 20 years due to the overstock of homes from the credit crunch. The S&P/Case-Shiller Home Price index fell to minus 8.9 percent for the year while the Office of Federal Housing Enterprise Oversight House Price index fell to minus 1.3 percent. The final economic release for the US showed consumer confidence falling to a five year low of 75.0 as growing turmoil continued to unfold for the struggling economy.
Despite the pessimistic outlook of the US economy, the securities markets picked up during the afternoon session as IBM increased their projected earnings and stated that the tech giant will buy back $15B of its shares. As a result, the DJIA jumped 114.70 points to 12,684.92 with IBM shares taking in the biggest gains, while pharmaceutical titan Merck topped the losers. The broader S&P500 picked up 9.49 points to hold at 1,381.29, led by Omega Protein Corp and Ducommun Inc, while Cott Corp and USEC Inc came out as the forerunners for the losers.
US Treasury prices were mixed as rising inflation pressed on long-term bonds, but picked up for the most part as worrisome investors sought after the safe haven of risk free bonds. The 2-Year yield fell to 2.03 percent with the 10-Year yield lowered to 3.86 percent, while the 30-Year yield rose to 4.66 percent. Tomorrow’s economic releases will give us a better insight of the current economic situation as New Home sales and Durable Goods orders will be released during the morning, followed by the Fed Chairman’s report on the economy and its policy.