Instead of calling him Dr. Bernanke, perhaps we should call him Dr. Frankenstein. You see, Fed Chairman Ben Bernanke and the good doctor have a lot in common. Frankenstein had his monster and Ben has his, and Ben’s monster is commodity price inflation. Once again we see money plowing into commodities as Europe looks to raise rates while here in the US we stand flat. In fact in the US, a weak ISM non-manufacturing number is going to give Dr. Bernanke more ammunition to his argument that we need more stimuli against his growing ever louder chorus of critics.
In Europe we see data improving. In Switzerland inflation is soaring. The EU has backed itself into a corner as inflation starts to creep out of its target rate. Yet a rate increase in Europe may make inflation worse as it will cause a run on commodities as the world's two largest economies get out of whack.
While the EU and the Fed Chairman Ben Bernanke might not see what is coming, China's central bank sure does. A day after raising their interest rate for the fourth time since last October, now it seems they are going to raise domestic prices for diesel and gasoline in a desperate measure to slow the pressure. They also allowed their currency to increase in value.
Dow Jones reported that, "China's yuan edged up to another high against the U.S. dollar under the current system late Wednesday, after the central bank set a record-low dollar/yuan central parity following its latest interest rate hike as it battles against inflation. On the over-the-counter market, the dollar was at CNY6.5440 around 0830 GMT, down from CNY6.5479 late Friday. China's markets were closed Monday and Tuesday for a public holiday. The dollar traded between CNY6.5438, its lowest level since 2005, and CNY6.5480. At CNY6.5440 to the dollar, the yuan has risen 4.3% against the U.S. unit since June, when China effectively ended its currency's two-year-long peg to the dollar. For the third consecutive session, the People's Bank of China fixed the dollar/yuan central parity rate lower. The reference point was set at 6.5496, down from Friday's 6.5527. Dealers said the euro's recent strength overseas, due to expectations of a rate hike announcement by the European Central Bank on Thursday, paved the way for a stronger yuan, which Beijing has reiterated is part of its arsenal of anti-inflation tools."
Of course, this might not be enough as upward pressure from the Fed and EU inspired carry trade might overwhelm China's inflation fighting measures.
Reuters News reported that, " China may raise retail gasoline and diesel prices by around 5 percent to new highs from Thursday, a report by an industry consultancy showed, in what would be the second Chinese fuel price hike this year amid a sustained rally in international crude oil prices. The government may raise retail ceiling prices for gasoline by 500 yuan ($76.43) a ton and diesel prices by 400 yuan a ton, C1 Energy said in a report on its website, citing a source close to the National Development and Reform Commission."
Yet is oil feeling a bit left out? While corn prices and gold hit record highs, oil is having a hard time breaking out of this 108 resistance area. That is perhaps because other commodities are catching up to oil. While the oil market has soared due to top geopolitical strife and the dollar, it appears that more than anything we are seeing the resumption of the carry trade and could get us carried away with other markets rising. The key for the markets will be whether China's steps to kill Bernanke's Monster will be successful or will the Inflation monster just be too strong. Make sure you do not get carried away!
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at firstname.lastname@example.org.