Headlines (Scroll down for complete stories):
1. Consumer Inflation Stalls
2. Bernanke Pressures China for Yuan Reform
3. Industrial Output Rebounds
4. Dow Hits New Record
1. Consumer Inflation Stalls
From the looks of today's consumer inflation report, the Federal Reserve just
may have managed to engineer the often-illusive soft landing.
After 17 rate increases, inflation finally appears as if it's starting to
buckle. The Fed, in pausing its rate increases for the past four meetings, has
said that it is waiting for the previous interest rate hikes to work their way
through the economy and combat inflation.
Story Continues Below
Today, the Labor Department announced that the consumer price index (CPI) was
unchanged in November. Falling energy prices kept overall prices in line.
Analysts were expecting a 0.2 percent increase in overall prices. And, core
inflation, which excludes food and energy prices, held steady last month as
well.
That translates into a 2.2 percent annual inflation rate, which is still above
the Fed's stated comfort range of 1 percent to 2 percent inflation, but has
eased from 3.4 percent last year. Core inflation, which is seen by the Fed as a
better barometer of inflation, is running at an annual pace of 2.6 percent,
slightly above last year's 2.2 percent increase.
The Fed — and the stock markets — may have just gotten an early Christmas
present. The markets have been waiting anxiously for signs that inflation is
easing, hoping that the Fed will start to cut interest rates. Lower interest
rates are good for stocks because they stimulate the economy, encouraging
borrowing, spending, and investment.
"All we wanted from this holiday season was a little more growth and a little
less inflation, and Santa looks like he has delivered. This is just a great
report," Mark Vitner, an economist at Wachovia Securities, tells Reuters.
Still, MoneyNews and sister publication Financial Intelligence Report have
warned of hidden inflationary pressures in the economy, which we call "stealth
inflation". For example, the government calculates housing costs by its rental
index, not by how much it costs to own a home, which artificially depresses
inflation. And there are many more ways the government manipulates the official
inflation number.
Bottom line: The government's inflation numbers are dropping. And that's good.
But it doesn't necessarily mean that consumers' wallets are getting fatter.
Editor's Note:
2. Bernanke Pressures China for Yuan Reform
Chinese policy-makers risk losing control of their economy unless they let the
yuan rise in value and strengthen their financial system, U.S. Federal Reserve
Chairman Ben Bernanke said on Friday.
Bernanke was in Beijing as part of a high-level U.S. delegation led by Treasury
Secretary Henry Paulson that was trying to persuade China to let its currency
float more freely to help reduce economic global economic imbalances.
"Monetary policy may be constrained by the lack of a reliable monetary
transmission mechanism and by the relative inflexibility of the exchange rate,
which inhibit the central bank's ability to keep inflation low and to stabilize
the economy," Bernanke said in remarks prepared for delivery to the Chinese
Academy of Social Sciences in Beijing.
U.S. officials want a stronger yuan to help cut America's record trade deficit
with China. This reached $24.4 billion in October, 40 percent of the total U.S.
trade deficit.
But Bernanke stressed that a freer-floating yuan, also known as the renminbi (RMB),
was very much in China's self-interest.
"More flexibility in the RMB would have important advantages. Forget about the
rest of the world: it would have important advantages for China. Without having
flexibility in the exchange rate, China cannot have an independent monetary
policy," he said in answer to a question after his speech.
A stronger yuan, combined with a wider trading band and with the ultimate goal
of a market-determined exchange rate, would allow an effective and independent
monetary policy and thereby help to enhance China's future growth and stability,
he said in his speech, which was distributed by the Fed in Washington.
Answering questions, Bernanke said the low U.S. savings rate was partly to blame
for imbalances in the world economy, but high savings rates in China and
elsewhere — as well as surpluses in oil-producing countries — were also a
factor.
"Global imbalances are not the results of actions of any single country. It
depends on the entire interaction of all the countries in the world," he said.
Bernanke omitted a reference that had been in his advance text about the
undervalued yuan providing an effective "subsidy" to Chinese exporters.
But he stood by his argument that, to the extent the yuan is undervalued, it
acts an incentive for companies to produce for export markets rather than for
domestic consumption.
China on Friday let the yuan hit its highest level since it revalued the
currency by 2.1 percent in July 2005 and began to allow it to float within
tightly managed bands.
Bernanke urged accelerated reform of China's banking and financial system,
saying that central banks can best steer monetary policy when investment and
borrowing decisions are sensitive to interest rate rises or declines.
"Monetary policy can work well only to the extent that financial markets are
sufficiently developed to allow the monetary authorities' interest-rate
decisions to affect economic activity in a reasonably predictable way," he said.
Bernanke warned that China's central bank will eventually run into problems if
it continues to sell bonds to offset the currency interventions necessary to
hold the yuan down against the dollar — a process called "sterilization."
Also, perceptions that the yuan is undervalued could fuel additional capital
inflows as investors bet on a rise in the yuan, he added. Speculative inflows
would in turn increase the need for greater exchange market intervention and
bond sales.
China also faces distortions in the allocation of capital from an undervalued
exchange rate and an underdeveloped financial system, Bernanke said.
"The principal imbalance lies in the composition of Chinese GDP (gross domestic
product), which is heavily tilted toward investment and net exports and away
from domestic consumption and government provision of social services," he said.
© 2006 Reuters.
Editor's Note:
3. Industrial Output Rebounds
Output at U.S. factories, mines and utilities rose a larger-than-expected 0.2
percent in November, but after a revised no change in October that was
previously estimated up 0.2 percent, a government report said Friday.
The downward revision in October was due to weaker data on durable goods
manufacturing than previously believed, the Federal Reserve said in its monthly
report.
All of the November rebound in output came from a 0.3 percent gain in
manufacturing, as mining output fell 0.2 percent and utility production dropped
0.1 percent, the Fed said.
Analysts polled by Reuters had predicted a 0.1 percent rise in industrial output
in November. Figures are seasonally adjusted.
Industrial capacity use was 81.8 percent in November, unchanged from the revised
October level, which was previously reported at 82.0 percent. Industrial output
was up 3.8 percent in November compared to a year ago.
Among industry groups, motor vehicles and parts rebounded by 3.7 percent in
November, more than offsetting a 3.4 percent decline in October. Motor vehicles
and parts output was down 2.4 percent from a year ago.
Manufacturing capacity use was unchanged at 80.3 percent. The use rate of
utilities slipped to 86.9 percent from 87.2 percent. Mining also edged down to
91.0 percent from 91.3 percent.
© 2006 Reuters.
Editor's Note:
4. Dow Hits New Record
The Dow industrials climbed to a record high on Friday after consumer price data
reassured investors that the U.S. economy is maintaining growth and inflation is
under control.
Investors also were encouraged by another round of robust earnings reports,
particularly from technology companies. Shares of Adobe Systems Inc. gained
after the design software maker late on Thursday reported higher profits and a
first-quarter outlook in line with Wall Street forecasts.
The November report on the Consumer Price Index soothed fears the Federal
Reserve might have to resume raising interest rates to keep inflation in check.
Both CPI and core CPI, which excludes food and energy, were unchanged from
October, the Labor Department said.
"People are starting to believe that the economy will have a soft landing
instead of sliding into a recession," said Mike Binger, portfolio manager at
Thrivent Financial in Minneapolis. "And it doesn't hurt that it's the tech
sector that is leading us out of the abyss."
The Dow Jones industrial average was up 51.91 points, or 0.42 percent, at
12,468.67. The Standard & Poor's 500 Index was up 4.35 points, or 0.31 percent,
at 1,429.84. The Nasdaq Composite Index was up 10.95 points, or 0.45 percent, at
2,464.80.
The Dow earlier rose as high as 12,480.21.
Adobe shares climbed 4.8 percent to $42.76, making it the top-weighted gainer on
the Nasdaq.
In a sign that investors are comfortable with both the interest-rate and
economic growth outlook, rate-sensitive financial services and growth-dependent
industrials were among the best performing groups on Friday.
© 2006 Reuters.
Editor's Note:
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