I'll be playing some catch-up for the next few days, going over what happened for the week ended February 25. I spent the last week in Austin where I watched little news. I did catch CNBC (I can't seem to get away from the damn market, can I?), but that was about it. And, there was no Gannongate mentioned at all! I didn't know what to do about that. Anyway.....
The Bureau of Labor Services reported that "On a seasonally adjusted basis, the CPI-U, which was unchanged inDecember, increased 0.1 percent in January. The food index also increase 0.1 percent in January after registering no change in December. A 0.2 percent decrease in the index for food at home was more than offset by a 0.5 percent increase in the index for food away from home. Energy costs declined 1.1 percent, following a 1.3 percent drop in December. Within energy, the index for petroleum-based energy declined 2.2 percent while the index for energy services rose 0.1 percent. The index for all items less food and energy increased 0.2 percent in January, the same as in each of the preceding three months. Medical care costs rose 0.4 percent in January and are 4.3 percent higher than a year ago."
Comments: This is good news. The overall low level of inflation gives the Fed some breathing room if it wants to pace the rate of its rate hikes. Also, fuel costs have dropped for 2 months. Part of this is seasonal - summer is typically a driving heavy season, which increases demand and therefore prices. However, crude oil was traded over $51/bbl for most of the week, indicating low energy prices may not last long. Finally, medical costs continue to increase, as indicated by the 4.3% increase last year. Because medical costs are inelastic - consumers cannot switch to a different service to receive the same benefit - the increase will crimp some middle-class budgets.
The Bureau of Economic Analysis reported that "Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 3.8 percent in the fourth quarter of 2004, according to preliminary estimates released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 4.0 percent.
Comments: At the end of last month, Canada announced it miscalculated the level of imports it recorded from the US. After the announcement, economic commentators mentioned the result would be an upward revision in GDP. This is also good news. The economy appears to be growing at a solid rate. When this number is analyzed with the low inflation number announced on Wednesday, the economy appears to be doing well.
The big news for the dollar came on Tuesday as South Korea announced it would diversify its dollar holdings. The news sent the dollar lower by 1.5% verse the Yen and Euro. However, South Korea baked away from this assertion on Wednesday. This is the second time an Asian country announced a plan to diversify out of dollar assets, only to repudiate the claim within a day. I am beginning to think this is a planned event. Central banks are in a difficult situation. While they have a large amount of dollar assets, they are also obviously looking to diversify. No matter what course of action they take - announcing their plan openly or quietly backing away without any announcement - their actions will have a negative effect on the dollar. In other words, their actions would move the market regardless of whether they announced it or not. However, if they did it quietly, it may lead to panic as traders wondered what was really going on, do the South Koreans know something we don't etc.... By announcing, backing away, and then going ahead with their plans