Uh Oh: Trouble In Federal Reserve Paradise

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Cracks are slowly showing in the policies of the Federal Reserve. A weak Dollar policy may ultimately fail to do what the Federal Reserve wanted and in the process hurt all Americans buy killing their buying power. Overnight, the U.S. Dollar was crushed again, dropping off another cliff and going to parody with currencies like the Canadian Dollar and the Australian Dollar. This morning, the PowerShares DB US Dollar Index Bullish (NYSE:UUP) is trading near 2009 lows at $22.21. The cracks are beginning to show as inflation is starting to bite at the heels. Producer Price Index (PPI) was released showing an increase of 0.4%. This is a very hot number, though core PPI came in at 0.1%. Core PPI is the inflation if food and energy are subtracted out of the mix. While most economists look at the core number as being more important, the overall number including food and energy is what taxes the American people. This massive rise in food and energy is showing that the Federal Reserves policies are having an inflationary impact on exactly what Americans spend the most money on. Most Americans spend most of their income eating and heating or cooling their homes. This number is a huge warning that the Federal Reserve maybe getting a little too much bang for their buck in the wrong areas. It is almost comical as the Federal Reserve is hoping to cause a rise in housing yet that is the one thing not increasing in value at all as they print, print, print.

In addition to the PPI, the trade deficit increased to -$46.3 for August after being at -$42.8 in July. This is another poor number that shows things going in the wrong direction. Jobless Claims were also disappointing, showing a rise in claims to 462,000. Last week the market got excited by a number that was under 450,000 for the first time in months.

Of all the numbers today, the PPI stands to be the most significant. If there is one thing that can cut the second round of quantitative easing that the markets have priced in, it is inflation ripping higher. As food and energy prices continue to climb, it is highly likely political pressure will mount to stop the Dollars fall. If this happens, the markets will be up the creek without a paddle as they have priced in a huge second quantitative easing. There is a lot of downside risk from these levels based on current economic numbers and risks.

As of now, the SPDR S&P 500 ETF (NYSE:SPY) are only trading down slightly lower pre market. Why? Because once again the Dollar is coming to the rescue and propping the markets up. Be on alert today, we may start to see the Dollar have less and less impact based on the PPI numbers.

Gareth Soloway
Chief Market Strategist