Traders returning to work on Monday found largely the same conditions that they had left work amid on Friday; no resolution to the Libyan upheaval, continued weakness in the U.S. dollar, and suggestive coming from various Fed ‘factions’ as regards the prospect for a change in U.S. interest rates. Mr. Gaddafi remained in power despite having lost control of all but Tripoli (and having all of his UK assets frozen) and crude oil prices were largely stable as the rest of OPEC appeared set to fill the gap which Libya’s turmoil has engendered.
The U.S. dollar drifted lower as currency market bettors saw the euro benefiting from a possible rate hike sooner rather than later (see below), and Friday’s hawkish tone by a normally ‘dovish’ Janet Yellen was tempered by Mr. Dudley this morning, after he said that rapid economic recovery in the U.S. ought not to imply the immediate tightening of monetary policy by the Fed. However, that same Mr. Dudley also warned that financial markets “should not doubt” the Fed’s ability to tighten “in a timely fashion” should inflation present any signs of rapid vertical takeoff.
Such signs, for example, have been on ample display in China (and India as well) and the weekend was not lacking in anti-inflation tough-talk from that country’s political and financial leaders either. In fact, Premier Wen declared that in order to ease inflationary pressures, his government is now willing to target a significantly weaker level of Chinese economic growth over the next half-decade. Therefore, the hiking of reserve requirements and of key interest rates in China remains very much on the table.
Chinese GDP targets have now been dialed back to a 7% growth rate for the period between 2011 and 2015 and that is quite a contrast to the 11.1% pace of growth that the country recorded in the 2006-2010 period. Premier Wen also noted that “growing [wealth] inequality threatens stability in Chinese society.” There have been reports of some recent pockets of unrest in urban Chinese locations, and they are thought to be inspired by events in the MENA region.
Moreover, it is being reported by Reuters this morning that “China cannot invest much of its foreign currency riches in the global commodities market, because doing so would only push up the prices of the raw materials that the economy depends on.” according to the country's top money manager.
Mr. Yi Gang, Head of the State Administration of Foreign Exchange (SAFE –now that’s an appropriate acronym, if there ever was one) speaking on Saturday. He also said that monetary easing in wealthy countries was driving down China's returns on its $2.85 trillion in official currency reserves, the world's biggest such stockpile.” In plain English, Mr. Yi Gang called for an end to “easy money” in the West.
India’s economy shows similar signs of cooling-by-intervention this morning, following a reported economic growth rate of only 8.2% in QIV of 2010 –down from 8.9% in QIII. Marketwatch reports that “the slowdown came after the Reserve Bank of India raised its benchmark lending rates in seven equal installments of 0.25 percentage point since the beginning of 2010 to check rising prices.”