The economic releases of the past week are pointing towards stagflation with a surge in inflation on the one hand (with CPI and PPI figures above market consensus) and signs of a slowdown (further weakness in housing, a marked drop in consumer confidence and a slump in durable goods orders). With a Fed bias towards further cuts, the risk is tilted towards a surge in inflation into the future. This is already showing up in a steadily steepening yield curve and a sharp rise in commodity prices, particularly gold (a traditional inflation hedge), silver and oil.
It is hoped that further rate cuts will help reinvigorate lending by banks by helping steepen the yield curve (making it more profitable for banks to borrow short term and lend long term) but it is difficult to see how this would work considering that those very banks are in desperate need of cash themselves to cover up for their burgeoning subprime pyramid scheme related losses. Sovereign wealth funds, awash with cash, have provided some relief but their contribution may be limited considering that the U.S. is in an election year prompting further scrutiny and disclosure requirement over this source of financing (this is already occurring both in the U.S. and the E.U.) and further deterioration in the health of financial firms may limit investor enthusiasm.
All in all, things aren't looking too bright for the moment but stay tuned for more...
