Sebastian

The problem with OPEC is that if they are to change tact, then they must agree it first. Even after agreeing it, it usually takes them 3 months to implement any change. They are not as influential as they used to be either, as the their global market share is not what it used to be. Let's start rolling out those cars fuelled by candyfloss.

I'm not sure I understand your argument. If refinery output is down, gasoline stocks are either depleted or the import of refined gasoline increases, if the same demand is to be met. So what does this mean for crude? Well, the domestic demand for crude may decrease temporarily but this is directly offset by the rise in gasoline imports, or in gasoline stock depletion. It is obviously cheaper for the US to produce its own gasoline using crude oil inputs, rather than importing it. The knock-on impact of their failure to produce their own gasoline in a scenario of depleted US gasoline stocks, means some other country will need to increase their crude inputs into gasoline production and this is will help push the price of world oil up. The actual total number of crude barrels used in a global context might be the same but markets like to take a perspective on these things. The market interpretation at present is that the US may struggle to meet its domestic demand for gasoline over the peak summer vacation period and therefore market players are justified in going long on the price of crude for as long as this perspective remains valid.

The current wave of rises has more to do with poor levels of refinery output from the US than anything else. These levels were expected to have picked up in recent weeks and thus far it has not happened and this has allowed oil prices to rise even further. Many investors that are long on oil at the moment don't expect the up-tick to continue in the medium term, though in the long run prices could easily go much higher. Any evidence in consecutive weeks of the expected improvement in US refinery output will force the price of oil down - for the moment. Markets are itching to sell, if the news is right, and light crude could easily fall to under $60 a barrel very quickly in coming weeks. It is not in OPEC's long-term interest to have oil prices rise too high, too quickly, because of a number of factors: The most immediate being the impact on global inflation, leading to higher interest rates and economic slowdown - resulting in dampening demand and a potential sharp retreat in oil prices. Of course they may also be concerned about major capital investment programs in substitute products, although my inkling is that oil producing countries probably snigger and take these with a pinch of salt at present. Were George Bush to spin a Reagan-like star wars plan - announcing a £2 trillion dollar research project into alternative fuels, then the oil barons of the world might be forced to sit up and take notice and to temporarily suspend their vacation trips to space.

I, for one, believe something major is on the way. The 3 day rally on US equity markets this week has me baffled and when one swithches to Bloomberg or CNBC today we are told stocks are rallying because of tame inflation readings which are likely to keep the Fed on hold. Tuesday's stock market downturn was put down to firmer US economic data which now more or less ruled out a rate cut later this year. How can the same argument support a move downwards and then a move upwards? But when we look at what happened to the yen today, we begin to get a clearer picture. Traders and those that advise them just want to keep on buying, at any cost and at any risk. The only way is up as Yazz and her plastic population used to say. Complacency has now reached frightening levels. The only method to take out this bull it seems is to slay it. The Reserve Bank of New Zealand's direct currency market intervention earlier this week to try and halt carry trades on the Kiwi dollar was largely ignored. It is exceptionally rare for a Central Bank to directly intervene to influence the value of its own currency and while the Bank of New Zealand's reserves are too small to worry world financial markets, other Central Banks will have taken notice. One could also say that the SNBs current series of interest rate hikes is a form of intervention to try and prop up the Swiss franc (a major funding currency in the carry trade). With the franc again falling to record lows against the euro today, the SNB will feel more than a little frustrated, having only raised rates on Wednesday. The Bank of Canada's David Dodge said only yesterday that the Canadian dollar's recent meteoric rise went against historical trends for the currency - in other words he said it is over-valued and it is what the bank categorises as a 'type-2' appreciation - driven by speculation. The markets have basically ignored warnings from all 3 Central Banks this week, believing they are just going through the motions and are powerless to do anything about it. The Bank of Canada could punish speculators by failing to raise interest rates, which they are expected to do, when they convene in July. They could justify it on the basis that recent 'type 2' currency appreciation was reducing the cost of imports and thus would bring down inflation, so the Bank's MPC don't now need to tighten at this time. As many currency pairs are trading at levels never seen before or at levels not seen for 30 years, major central bank intervention, in a real way, may be closer than we think. The yen is the big problem and with the Bank of Japan yawning their way through this whole crisis, it is time for others to step in and be counted. Why don't US political officials complain about the value of the yen in the same way as they do about the yuan? No global currency is manipulated in the same way as the Japanese yen. The Fed's Janet Yellen apparently said today that there is a major responsibility for the world's central bankers to work together to resolve the major global capital imbalance issue that persists. Significant investors in US assets should be more concerned about the yen than the yuan, because one of these days a trigger is going to pull the rug from under the entire carry trade and the whole house of cards is going to come down. That day is coming soon, very soon.

I don't think Spain's woes have anything to do with joining the euro. The house price bubble was of their own making as it was their primary method of attracting foreign investment into the country. They do have a serious current account deficit, but so do Portugal and Greece, so they are not unique in that regard. All 3 come from the second tier of the EU's economic elite and for many years were the EU's emerging economies and not established ones. By the way their GDP was 4.1% in quarter one, well above that of the other major economies in Europe.

It is interesting to note how sterling has appreciated today. Generally when inflation figures come in lower than expected one would expect the opposite to what we have seen so far today. There may be a few reasons for this: 1) Sterling has been aided by a liquidation of euro long positions, which have seen the single currency on the retreat, effectively since last Wednesday's ECB meeting. 2) The carry trade has held up remarkably well since the Reserve Bank of New Zealand intervened on the currency markets on Monday, to prevent the Kiwi dollar from appreciating further. With carry traders more reluctant to go near the New Zealand dollar, sterling is now an even more attractive propostion for the carry trade and is sure to have been helped by carry trades in the past 2 days. Of course this will probably prove temporary and any unwinding of the carry trade will subsequently see sterling falling more sharply. 3) Markets were more inlfuenced by Mervyn King's speech on Monday than Tuesday's inflation report. If this is true, then King's words will fade as the days go by and markets will make its assessment as new data is released. 4) A surprise improvement in the UK's trade deficit Tuesday may have outweighed the 'sterling' disappointment of waning inflation numbers. The most unlikely reason, as a widening in the trade deficit in recent months did not hurt sterling at all. 5) Sterling long positions have been held until traders get sight of this week's US inflation data. If US consumer price inflation rises, then the longer run outlook for rate differentials between the 2 countries might look completely different come this Friday. In this event, sterling could be heading for a prolonged period of decline against the dollar. If US retail sales are strong on Wednesday, then there could be a sizeable exodus of sterling positions even before Friday.

I don't think oil prices have peaked, but there is plenty of downside risk to oil prices, as much as there are upside price risks. If you had asked a 100 people last August, when light crude hit $78 a barrel, whether we would see a $100 or a $50 barrel first, not many would have said $50. Oil nations were running for cover back in January trying to dream up stretegies to push the price of oil back up, because they feared a total collapse in their oil revenues.

Commodity prices are driven by supply and demand and they are also very sensitive to the general well-being of global financial markets, as their prices have been greatly inflated by the speculative bullish market. Nickel is over twice the price that it was last year, while the GFMS base metal index shows that base metal prices are on average 40% high than at the same time last year. A downward correction is taking place now and reports from China show that demand from that quarter is going to slow over the next 3 months, as their own stockpiles have risen considerably of late. Add to this Chinese Government's threat to cool the unsustainable level of growth recorded in China earlier in the year. It can also be said that metal prices have not factored in the slowdown in US construction and stockpiles will continue to feed slowly into that sector. The US, being the world's biggest user, is the greatest influencer on oil prices. US stocks of crude and gasoline have begun to rise again in recent weeks, after a sustained period of depletions. Also, US production has been running well below capacity owing to a number of oil refinery problems and defects and with these refineries expected to start coming back on tap in the next few weeks, demand for crude imports to the US is going to fall and that is going to make the price of oil decline. Of course we can't legislate for geopolitical problems, but the smart money is on a decline in oil prices in the next few months.

I would say the warning from King yesterday was deliberately timed to offset against a lower than expected inflation rate hitting the financial markets this morning. Sterling appreciated in advance of today's CPI data and King has left the markets somewhat guessing - for now! On the face of it, the 2.5% annual rate was significantly lower than April's 2.8% and lower than the forecast 2.6%. We are moving into a period over the next 3 months where commodity prices could be set to drop (deliberate cooling of growth in China and elsewhere, increased stockpiles of base metals pushing prices lower, damaged oil refineries returning to production etc.) and global inflation pressures may ease. Remember oil prices reached their peak in August last year, so the year on year comparison of oil prices should help CPI. It may well be that there is only one more rate hike left in this BoE tightening cycle and if commodity prices fall in the next 2 months, it might even be questionable as to whether that hike will even be seen by August. Sterling has thus far held its own after today's CPI data, but it may be a last hurrah before a prolonged southward move for the currency, particularly as the outlook in the US begins to shift. With inflation (evidently we are told) on the way down and with 2 further interest rate hikes priced into sterling, there appears little reason for traders to continue to buy sterling - based on the data we have in front of us now.

The floor is all yours to make your case. I am a very good listener.

A good one to watch in the months ahead is the US Trade Balance with Canada. The Canadian dollar has appreciated 10% against its US counterpart since March. Given the close proximity of the 2 nations and the fact that 80% of Canada's exports go to the US, Canada may have bitten off more than it can chew on exchange rates. It has had no impact in April as Canada today recorded a trade surplus of over CAD8 Billion to the US, quite a feat in itself when you consider the entire Trade surplus was less than CAD6 Billion. April's trade surplus in Canada was the highest in 18 months. If you are living in Seattle and the produce is suddenly 10% more expensive coming from Vancouver as opposed to Oregon, what would you do? Of course the Canadians may not add the price increase owing to the exchange rate, but then what does that mean for earnings for Canadian companies that operate off margins of 4%-5%. An interesting exchange rate conundrum ahead for US/Canada trade relations I would say. I noticed today that Canada's manufacturing and trade sectors both lost jobs in May, despite the apparent boom we are being told about in Canada's economy.

Yes, you are right, the yield is what I was referring to. Sorry for not making that clear.

The relationship between money growth and inflation is less than a perfect one and there are two schools of though on it. In fact it is being said there there is disagreement within the ECB right now as to whether money growth should be a serious consideration at all in the deliberation of monetary policy. Consumer spending, although a positive contributor to the US economy, actually slowed in quarter one, so I'm not sure what the MasterCards losing the run of themselves has to do with it. Nothing I would suspect. The US is lucky that oil and all major commodities are denominated in dollars, otherwise the much-weakened dollar would mean the US would have a massive problem with imported inflation (were barrels of oil denominated in euros they would have been paying significantly more), as it is a net importer and a terrible manager of its trade balance. My favourite for a financial crisis is a collapse of the carry trade and for New Zealand to fall through a hole in the antarctic, where the RBNZ's Governor Bollard is trying his best to put it. Second favourite is a major divergence in the performance of the euro's leading economies and a crisis for the ECB which will see the euro retreat at a rate of knots and have the dollar reinstalled as the teacher's pet without having to even hand in its homework.

But the US economy is picking up. The manufacturing and services sectors reported the fastest expansion seen in 12 months during May. You can look at a whole cross-section of reports to validate this, whether it is official output figures from government, national business surveys like the ISM, or regional production reports and regional business surveys. If you don't believe official government figures on employment creation you can look at the independent ADP report which also points to employment expansion or to the employment components of regional business surveys which have all been growing. In fact some might say government figures cannot reflect real changes in employment in the manufacturing sector because despite the indicators from business pointing to increases in employment, official figures still show the manufacturing sector shedding jobs. Consumer confidence has been growing and spending continues to rise. While the construction sector and house sales remain restrained, this has not prevented other sectors from expanding. Why would the market want to hike up treasury notes into something they are not? Just whom do you think the market is? The fact is that markets are taking a reality check this week and rising global expansion and potential inflation pressures down the road just happens to be good for the 10 year note. I mean look at where commodity prices and money growth has gone - are treasury notes not entitled to take realisation of some inflation impact of all these moves? More risk adverse investors who see a bull market that has gone too far may certainly see US treasury notes as a safer bet for now.

Good question. The odd thing is that the question is only being posed by US financial markets in recent days, possibly triggered by rate rises in the euro zone and in New Zealand and by the general hawkish tone that is predominant right now. US economic data over the past 2 months has shown significant improvement in some sectors but it had zero impact on the bullish run on the Dow up until this week, with most equity investors still preferring to believe the Fed may be cutting rates. US inflation itself has been on the wane in the past number of months but global inflation worries are giving rise to fears that US inflation may rise again, thus promting the nervous reaction we have seen on the markets. The main culprits are oil, gas and commodities on a global front but a resurgent US economy also has to deal with all the domestic inflation issues any economic lift brings with it. To find out what these are we need to watch US inflation and earnings data for the next while - starting with the consumer price index next Friday. If inflation is shown to have fallen, then there will be many red faces out there after what we have seen this week.

I have been saying for some time that the US economy has been showing signs of picking up, with some sectors expanding at the fastes rate seen in 12 months, so it is improving. Also, even if the US in quarter 2 were to notionally expand at the same pace as quarter 1, the actual GDP rate for quarter 2 would be higher - the reasons being inventories were exceptionally low in quarter one and these could only grow from there even if they were never sold and secondly, federal government spending in quarter one contributed negatively to GDP and that can hardly happen this quarter (think of the defence budget alone approved by Congress recently). The housing sector and the subprime mortgage issue is still a drag on the economy, but the evidence is that it has not spilled over into other sectors of the economy. You could say that subprime mortages and not higher interest rates have been the core problem for the housing sector and it was inevitable that this was going to come to a head at some point. Large economies have shown quite an ability to rebound from low growth levels between quarters. Canada went from 1.5% in quarter 4 last year to 3.7% in quarter one 2007, while Japan went from 0.8% in qaurter 3 last year to 5.0% in quarter 4. For it to be a real signal of a possible pending recession, you would probably need to be registering sub 1% growth levels for 3 consecutive quarters.

Remember this is a longer run view. US rates may not rise for some time to come yet, so the impact on the ground won't take effect until the policy actually changes. By that time we will most likely have at least quarters 2 and 3 in the US behind us. If GDP rises from the 0.6% in quarter 1 to say 3.0% by quarter 3, then the Fed will feel more than justified in hiking rates again. The problem the Fed has is that while current US inflation seems to have moved closer to their comfort zone, greater global economic expansion is putting added pressure on global inflation - rising energy and commodity costs, which if it continues is going to add to domestic inflation worries in the US. Were this happening while the US was barely growing (quarter 1 GDP of 0.6%), then it sure would present a massive problem and further rate hikes would most likley result in a recession. It is made much easier when US growth is up near its potential growth rate. Of course an argument could be made that global growth is very much dependent on US growth and if the US economy was stagnant, then global inflation pressures would be greatly eased.

The dollar is rising because of widening yields on US treasurys - primarily the 10 year note. The 10 year note yesterday broke through the 5% level for the first time since last August, triggering a liquidation of equity funds and a transfer into treasurys, and by proxy the dollar. The reason yields are widening has to do with with a stronger economic outlook which could mean higher interest rates in the longer run, as you said. There is no indication yet of any pending rate rises in the US, but the economic outlook now perceives higher rates rather than lower ones in the longer term. This could still mean the Fed will be on hold for some time to come yet. This has been brought about by positive economic news - not negative, although the rise in treasury yields is not good for stocks. It is merely a correction - in terms of balancing funds against the economic outlook.

Why should I be under any impression of any sort? I don't claim to be right on anything, I simply offer an opinion. Take it or leave it! I will state the facts at times, when needed, because sometimes they get lost in the emotions vented in various discussion forums like this. If you think my contributions are worthless, just ignore them.

Nope. When interest rates fall it is usually done to stimulate a dragging economy, by making money cheaper, thus encouraging more borrowing and by consequence more spending, which will then help to expand the economy again. An economy that is being sucked into a recession is likely to see a succession of interest rate cuts in an attempt to ward off the dreaded economic doom. The US economy slowed towards the end of 2006 and early 2007 and inflation also eased - although slowly. Had this slowdown continued, the Fed would have been forced to act to save the economy from a pending recesssion. In any event, if inflation continued to wane, the Fed could more easily justify cuts in interest rates. The fact that an interest rate cut now appears off the table is testimony to the recovery in the economy itself and not owing to any policy intervention by the Fed (who have had rates on hold for the past 12 months). The US is coming from a low economic growth level in the first quarter and has plenty of room to expand to the end of this year. Given that this economic pick-up is happening without the aid of reduced interest rates, tells us the Fed called it right last year. They correctly called for and predicted a cooling off period in the economy before growth would begin to expand again (the famous soft landing), while saying inflation would remain a menace throughout it all. Rising interest rates are designed to curb spending habits, but if earnings and borrowings continue to run higher, it becomes more difficult to control. The problem with interest rates is that it effects business as much as the consumer and higher interest rates results in higher borrowing costs and higher repayments for business. Remember, companies are very highly geared these days (financed by loans). Employees want higher wages because their cost of living has increased. Companies caught in competitive markets with tight margins begin to get squeezed and start getting into trouble. A quick sequence of interest rate hikes in an economy can have a very damaging effect, particularly if rates are already at a high level, like in the UK. This could result in a situation where the negative impact of the rate rises leads to a collapse of certain sectors of the economy, resulting in a hard landing and putting the economy on the cusp of a recession. A Central Bank is unique in the sense that it has the ability to cause a recession all on its own. The key to successful monetary tightening (rate rises) is knowing when to stop. The US Fed last year stopped in June, although inflation did not reach its peak until the Autumn. If the Fed continued to raise rates until the Autumn, they could easily have sent the US into recession in the first half of this year. When looking at the UK, this ought to be remembered, when inflation data seems to be demanding higher interest rates here and now. I am an economist and work as a fulltime analyst and adviser on currency markets.

Futures markets change all the time upon release of key data that might lean rate prospects in one direction or the other. Spot markets are current prices and they too take a lead from futures markets. Spot markets are never wrong because they are the actual price at the current point in time. Whether you believe the price or the underlying reasons for the price to be correct or not is purely incidental - the price is what the price is. It is never wrong! The current dollar price reflects a market consensus that US interest rates are going nowhere in a hurry. Fact! Futures markets have now all but written off any prospect of a rate reduction this year and that too is priced into the current value of the dollar. If you can keep two steps ahead of the futures markets then more power to you. If you truly believe a rate hike is imminent in the US, you could put your mortgage on the dollar and come away with a free house before too long. Such a prospect would have a profound impact on currency markets.

I did not say it was a signal for a cut. I stated that it meant the next policy change could be a cut or a hike. There's a big difference. I myself never saw the Fed cutting rates this year, and at no time did I ever state it or even predict it. What I think is irrelevant in the context of what the market prices in. The Fed's statement is for the benefit of the market and if they choose to change their language it is because they wish to change their message or tone. They know exactly how the market will interpret it and if the market interprets it incorrectly, then they will have chosen the wrong set of words.

FOMC in January: The Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information. FOMC in March: In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information. Herewith the change in the 2 statements. 'any additional firming' means tightening or rate hikes while 'future policy adjustments' paves the way for policy loosening as well as firming, thus sending a clear signal to the market that the next rate change is not certain to be a hike. This is what markets responded to. The Fed don't change policy statements lightly and any word changes are there for a specific reason.

A cut was priced in back in March because the Fed themselves softened their tone in their released statement after their FOMC meeting. The Fed effectively told the markets then that the next policy change might be a rate cut, by deliberately changing their language. They did state that their principal concern was still that inflation might fail to moderate, but the fact they opened the door to a possible cut in the future, meant future markets were going to price in a rate reduction. The Fed knew what they were doing. If the US economy had not strengthened in the way we are seeing over the past 2 months, then a rate reduction as early as August was a distinct possibility and that's how markets interpreted it.

This Fed has been decidedly hawkish ever since they put rates on hold 12 months ago. It is only in recent months that the tightening bias has been restrained a little in their issued statements, which reflects the slowing economy, waning inflation and problems in the housing sector. The fact is that markets expected the next move from the Fed to be a cut and recent improved data from the US has now all but scuppered that hope. That's why equity investors have been scampering in recent days. But ultimately it does not take from the fact that underlying inflation trends have been eroding in recent months and that in itself is going keep the Fed on the sidelines for the time being. If the economy picks up at a much greater pace than expected then the goalposts will have moved, but we are not yet at that point. May's CPI data will give us a temperature check when it is released. I am one that has been highlighting a serious improvement in the US economy in the past 2 months, while others have tried talking it into a recession. Believe me, I would love to see a hike in the US because I have a monetary interest in it, but it is not on the cards as we speak.