The U.S. economy was hit with a doubled barreled shot of bad news on Tuesday, which promptly caused the Dow Jones Industrial Average to rally. Perhaps it was the announcement that IBM would buy back $15 billion in stock that caused the rally but it is hard to understand how that trumped an inflationary Produced Price Index (PPI) report and a downright depressing Consumer Confidence report.
The PPI for January was up 1%, slightly better than expected with the core index (excluding food and energy) up 0.4%, which was higher than expected. The Conference Board reported that Consumer Confidence for February dropped more than 12 points to 75 from January’s 87.3 reading. The number is at its lowest level since the start of the Iraqi War in 2003. If you exclude that downward spike you have to go back to 1993 to see it this low.
The consumer expectations component of the report was even more depressing, dropping to a 17-year low of 55.3. “With so few consumers expecting conditions to turnaround in the months ahead, the outlook for the economy continues to worsen and the risk of a recession continues to increase,” noted Lynn Franco, Director of The Conference Board Consumer Research Center, in the report.
Yet the inflation news could be worse. Crude oil once again settled above $100 and grain futures have blown away their historical highs in recent days.
European economies and central banks appear much more concerned with inflation while the Fed is banking on a weakening economy extinguishing recent high inflation numbers.
This has led to a resurgence of dollar weakness. The dollar in recent months appeared to have bottomed out, trading in a range from 75 to 78. There was no fundamental reason to support the dollar but no one really wanted it to dip any further than it did in the fourth quarter but with Fed poised to fight a recession (and support equity markets) at any cost while ignoring inflation and European Central banks unwilling to ignore inflationary pressures, currency traders feel justified selling the dollar to new all time lows. The front month Dollar Index set all time lows and settled below 75 for only the second time ever on Tuesday. The psychological support that seemed to keep the dollar above that level despite the Fed’s interventions in January may be gone.
The Fed has chosen to support the economy and deal with inflation after the economy improves. The one problem is that inflation is already here and appears to be waxing not waning as the Fed lowers interest rates.
