The French are boasting about having downed an airplane of the Libyan Air Force, and there are more worrying news coming Japan today, as if the Portuguese government`s fall were not enough to stress the trader community. Gold is appreciating along with oil and other commodities, but this should not be seen as anything other than a reflection of the general speculative trend that has been driving their prices up for quite some time.
As the week closes, the uncertainties that have so far failed to dampen speculative sentiment continue to undermine it, but the pressure will probably intensify as the aftermath of the Portuguese government`s fall becomes clearer to traders. We do not know yet how far the repercussions of this small nation`s difficulties will reach, nor do we know how likely it is that similar scenarios will play out in nations like Ireland, Spain or Italy. These problems will remain a fixture on the picture for months and indeed years to come, because they are too big to go away in short order and are always heavy in the minds of traders as a consequence of their central role in the big picture.
One should not expect the next leg of the sell-off, when and if it materializes, to significantly alter the mood or composure of traders, because all interest is on the Fed`s actions at the most basic level. The present weakness in the market will not last for very long, because the E.U. Authorities will intervene in the sovereign debt issue soon. The Libyan crisis is likewise very likely to turn into a chronic problem in a few weeks, and the Japanese issue will naturally calm down as the nuclear problem recedes from the headlines. The Fed`s determination to keep the markets afloat will thereafter surface as the main force behind trends, and it will likely be the dominant one.
Central bank activity for the major currencies was again rather sparse last week, with no major rate decisions coming out.
Central bank observers had to make do with the release of the FOMC minutes and the BOE Inflation Report hearings.
Furthermore, rather little was released in the way of significant economic data last week, since the week's trading sessions were shortened by the major U.S. Thanksgiving bank holiday observed on Thursday.
Last Tuesday, the U.S. Fed's Federal Open Market Committee released its minutes for their November meeting that was held on November 2nd and 3rd. The minutes offered some insight into the Fed's plans for Large Scale Asset Purchases or LSAPs, as well as indications of the Fed's economic projections and the prospects for future monetary policy.
In addition to the FOMC minutes, the Fed also released minutes from an October 15th conference call where committee members discussed how to conduct further easing measures and the potential targeting of a term interest rate.
The minutes also showed that the most recent QE II package was approved by the committee with an almost unanimous vote of 10 to 1. Nevertheless, there was some disagreement on the amount of quantitative easing the economy would require to return to a reasonable level of growth. Despite that disagreement, the members felt that the advantages of the stimulus package would outweigh the drawbacks on balance.
The FOMC minutes also demonstrated that the Fed had downgraded its estimates for future unemployment, which is currently projected to fall within the 8.9% to 9.1% range for 2011. In addition, inflation is expected to rise in the near term but still forecast to stay below the 2% level.
Significantly, the committee also downwardly revised its growth estimate for the U.S. economy, and members now expect U.S. GDP to grow by 2.4% to 2.5% for 2010, 3.0% to 3.6% for 2011, 3.6% to 4.5% for 2012 and 3.5% to 4.6% for 2013.
Participating members also noted that real estate investment, manufacturing and trade indicators were also considerably weaker than expected and that the initial benefits from the first round of quantative easing measures were no longer providing what they deemed to be necessary support for the U.S. economy.
Finally, the minutes reflected that given the current state of the U.S. economy, the Fed's monetary policymakers do not currently see any kind of rate hike taking place until at least the fourth quarter of 2012.
Despite the less than positive economic outlook, most FOMC members continue to remain optimistic, although one member warned that Large Scale Asset Purchases could spark inflation and could therefore undermine the Fed's independence.
The Bank of England Governor and some MPC members participated in hearings on the BOE's quarterly Inflation Report on November 25th of last week. The hearings were held before the British Parliament's Treasury Committee which basically reviews the MPC's and the BOE Governor's monetary policy approach toward fighting inflation.
In his opening statement made before the Treasury Committee, BOE Governor Mervyn King commented that,
"there is no reason to expect that inflation will be significantly affected by further movements in the exchange rate, taxes or commodity prices."
He then concluded his opening statement by observing that,
"overall, a majority of the MPC have concluded that the risks are, at present, broadly balanced. But we all stand ready to adjust policy - in either direction - should the outlook for inflation demand it."
Furthermore, in his testimony before the Treasury Committee, King stated that the outlook for demand in the U.K. was considerably uncertain and that the BOE was therefore challenged in controlling inflation.
In addition, King said he sees U.K. GDP growth as coming out lower than the original MPC forecast.
Next week's central bank activity has the U.S. Federal Reserve Bank releasing its Beige Book this coming Wednesday, December 1st that is more formally known as the Summary of Commentary on Current Economic Conditions.
Released eight times per year, the Beige Book surveys anecdotal evidence from key business contacts, economists, market experts and bank officials from each of the 12 Federal Reserve districts about local economic conditions.
The FOMC uses this economic analysis to help them make their next monetary policy decision, although the FOMC also uses the Green Book and the Blue Book that are not made public and which are thought to be more influential on policy.
In addition, the ECB will be announcing its Minimum Bid Rate Decision and will hold its associated Press Conference on Thursday, December 2nd. The European central bank is currently expected to leave rates unchanged at 1.00 percent for the eighteenth straight month.
