The Only Index Rallying Today Was The CRB Futures
It was a strange ending to a strange week. The deflation theme got some supporting evidence with the 0.4% decline in the November PPI for finished goods and the 0.3% decline in the core version of the index. A big drop in energy prices and a sharp reversal in last month's jump in motor vehicle prices combined to bring down the PPI. Typically, a surprise drop in the core PPI yields a rally in bonds. There was a rally in bonds today - a "yield rally." The cash-market 30-year T-bond fell more than a full point in price. In the pre-deflation-scare days, an unexpectedly large drop in the PPI would have prompted a stock market rally on the assumption that the Fed would stay "friendly." Instead, the S&P 500 dropped 1.34% and the NASDAQ dropped 2.64%. The University of Michigan preliminary December Consumer Sentiment Index jumped an unexpectedly 2.8 points to a level of 87 - its highest reading since August. Normally, one would expect the retailing stock index to rally on this news. Instead it fell 2.27%. What did rally, however, was the CRB futures index. It was up 1.14 points today and 1.25 points on Thursday. The CRB's close today was its highest since early 1998. This is a strange deflation indeed with commodity prices on the rise. In the past few days, the big movers in the CRB have been energy and gold. Why energy? For starters, OPEC raised its production quotas. That should lead to an increase in oil prices? This counterintuitive argument is that by raising quotas, OPEC members will stop cheating as much as they have been. The expectation is that this will result in small decline in actual production. Yeah, right. Perhaps more important, a big producer, Venezuela, is not producing anymore because of national strikes. And a shooting war with Iraq might be on again as the US thinks that Sadaam didn't tell the whole truth in his magnum opus dropped on the UN last week. Moreover, the US thinks that another member of the evil axis, Iran, is secretly working on a nuclear weapon. And finally, North Korea, yet another axis member, announced that it was re-lighting its nuclear reactor because the US had cut off oil shipments to it. The long and the short of it is that "geopolitical" (my nomination for most over-used word of the year) tensions are increasing, which could light a fire, so to speak, under energy prices, and, maybe gold. But why not a rush to the safe-haven of US Treasuries? Perhaps global investors are starting to doubt that the $1.4 dollars that they advance to the US on daily basis will be returned to them with same value at which they are being advanced. After all, we are using their advancements to buy ourselves bigger cars, bigger houses, and cruise missiles. This is not exactly the stuff of future productivity growth. Therefore, we might have to suffer a decline in our standard of living in order to pay the interest and dividends on these foreign advancements, let alone, pay back any principal. But before we did that, we might try to print our way out of it. After all, all of these foreign advancements are denominated in US greenbacks, and as our newest member of the Fed Board told the world a few weeks ago, we have the know-how to print greenbacks until the cows come home. I vaguely remember a French president in the late 1960s telling the US he was not going to accept any more of our IOUs in order to finance our war in Southeast Asia. I wonder if something like this might not be starting up again? At any rate, the Euro finished at 1.0235 (dollars per Euro) - its highest value since early 2000. If the behavior of US financial markets this week is an omen of things to come, US dollar assets may not be the place to be in 2003.
Paul Kasriel
Director of Economic Research
northerntrust.com |
