Mechanistic monetary policy could lead to recessionReleases from Europe:

April Forecast Actual
German Import Price Index (MoM) +0.7% +0.9%
German Import Price Index (YoY) +5.5% +5.7%
May
French Consumer Confidence Indicator - 37.0 - 41.0
Continuing stress is being shown in the correlation between price increases and the decline in consumer confidence. French consumer confidence is now at its lowest level since the inception of the series in 1987. Let’s put this in perspective. The highest level was in June last year when the indicator recorded a level of -13. That means in 10 months the indicator has reversed from a record high to a record low.
If the ECB can make statements about the undesired volatility in forex rates then surely this puts the reactions to the burst of the globalization bubble into perspective. Current conditions are abnormal but the central bank fails to recognize a basic crisis in the midst of their economy…
And Germany’s first CPI numbers to come from Saxony have seen inflation push up to +3.1% and the import price index to a +5.7% gain over the year. All the ECB can do is threaten to hike rates if consumers push for higher compensation…

The following economic releases are due today:
April
U.S. Durable Goods Orders (MoM) - 1.1%
U.S. Durable Goods Orders ex transp (MoM) - 0.5%
May
Italian Retailers’ Confidence General 106.2 (prior)
Italian Services Survey 4.0 (prior)

There has been very little new information to enter the market domain during the Asian session but my attention was taken by comments made by the BOJ governor Shirakawa who spoke astutely about the impact of developing economic bubbles, much of it obviously from Japan’s experience since the early 90’s.
He called the potential for market bubbles to develop following periods of price stability and low inflation as “paradoxical” and warned that focusing “narrowly on the current observed inflation rate” would risk “necessary monetary policy adjustments being delayed, including large fluctuations in economic activities.”
Clearly he cited Japan’s long period of low inflation and interest rates following the 1990 crash which ended in a bubble since earlier this decade. Perhaps the term “bubble” is not quite appropriate since there was never any excess. However, the point should be well taken.
With the credit crisis having grabbed most of the attention for several months the issue of externally generated inflation has almost been glossed over. Of course central bankers say it’s a concern but this has been caused by the globalization bubble and has become the number one threat to the global economy.
CB officials are also approaching the issue of inflation from a single perspective: it needs to be controlled by interest rates and to “punish” high wage settlements by loading on more pain onto the already stressed consumer.
This emphasizes a mechanical attitude towards monetary policy and fails to recognize that not only are markets are a factor of emotion but also consumers’ emotions are a factor in the way prices develop.
People react emotionally. When forced these emotions become strong enough to force a confrontation that will cause the mechanism of the economy to change. This will come through reduced spending as the public act to protect their wealth as best they can and to protest against the stress they endure as they find bills harder to meet.
By taking a pure text book mechanical approach to current economic conditions the central banks are going to stoke the fuel for their own problems and risk consequences that could escalate both inflationary pressures and a severe economic slowdown, possibly recession.

Note important support and resistance areas:
USDJPY EURUSD USDCHF GBPUSD
Res: 105.33-68 1.5817-45 1.0354-72 1.9909-50
Res: 104.32-46 1.5762-95 1.0310-30 1.9849-74
Spt: 103.44-79 1.5670-30 1.0214-40 1.9740-80
Spt: 102.56-72 1.5588-13 1.0127-34 1.9685-13
See Also

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