Weekly Commentary: Sound Money Anyone?

April 10, 2012

04.10.12

With good first quarter gains behind it, the market is now assessing the outlook for the rest of the year. This is producing some near-term trepidation.  Friday’s less-than-expected employment gains [120k actual, 200k estimated] capped a week of disconcerting news:  ISM Services [56.0 actual, 56.7 estimated], Spanish debt yields [higher than hoped] and the release of the latest FOMC minutes.

The FOMC March policy meeting minutes talked about forward policy guidance being conditional on economic developments.  This implies that dates for policy change [when will the excess money printing end?] are subject to revision.  Revisions might be in response to faster than expected GDP growth, higher than expected inflation or perhaps exchange-rate market/bond market rebellion.

The Fed is often considered to be the market’s Rosetta Stone, and Tuesday was no exception.  The markets responded immediately by trading the dollar higher [fewer dollars in circulation], dropping commodities [they are priced in dollars] and strengthening treasuries [lower risk of inflation].

Some market observers argued that the Fed’s mindset should not have been a surprise, since the Fed is always updating its forecasts and policy based on the best [and most recent] data.  There are also some who argue that the effectiveness of additional easy money [at least for this economic cycle] is minimal.  It is obvious that the end to limitless easy money was not built into quarter-end prices, and that the transition to sound money is/will be challenging.  Stay tuned.

“Government is a trust, and the officers of the government are trustees; and both the trust and the trustees are created for the benefit of the people”

Henry Clay