German PPI Rises, US Inflation Rises, EU May Start Axing Subsidies
Mark Whistler is the founder of www.WallStreetRockStar.com and is the author of multiple books on trading. Mark’s newest book, The Swing Trader’s Bible – co-authored with CNBC/Fox News regular guest Matt McCall – will be on shelves in late summer, 2008. In addition, Mark also writes regularly for TraderDaily.com and Investopedia.com.
Sign up for a free trial to Forex Force with Mark Whistler, a twice-daily alert service from professional trader Mark Whistler featuring intraday and swing trading setups. Click here to start your free trial.
1. The Tuesday Wolfgang PPI Euro Rally
The News
Overnight, German Producer Prices (PPI) showed a 5.2% gain in April, over the same month last year… sparking a massive rally in the euro.
The Breakdown
Germany is the powerhouse of the Euro Area economy, but right now, it is riddled with inflation. As soon as the news broke, the euro took off higher, as traders inferred more hawkish comments to come from ECB members.
According to the Dow Jones Newswires, Wolfgang Franz, the president of a prominent German think-tank ZEW, came out right on queue and said he expected the ECB to raise interest rates “in the near future.”
The Bottom Line
Inflation is a problem in the Euro Area, there’s no doubt about it. At the end of the day, higher ground for the euro will most likely only be prompted in the coming days by continually hawkish comments from ECB members, which at present, is highly probable.
Â
2. U.S. Inflation Elevated in Core Goods
The News
U.S. inflation clocked in at 0.2% in April, showing a slight pause over the 1.1% increase in March.
The Breakdown
Reading between the lines; however, we see that on a year over year change, prices for finished goods increased 6.4%, while that of core goods grew 24.5% year over year. Also worrisome, core crude goods grew 7.9% month over month, while finished goods grew 6.4% in the same period.
What this means is core goods producers are having significant problems passing cost increases onto their customers. However, the overall inflationary pause in April is the silver lining, except for the fact that oil hit fresh highs today.
The Bottom Line
With inflation rearing up in the notoriously hawkish Euro Area and oil at highs, the elevate year over year PPI prices from the U.S. will likely be drowned out in the wake of larger attention to the euro – by policymakers and the press.
Â
3. The Best News from the EU All Year
The News
The European Commission announced that it is proposing partially axing farming subsidies by 2015.
The Breakdown
According to the BBC, “The draft policy requires approval by all 27 EU member states and the European Parliament. It calls for milk quotas to be raised then scrapped by 2015.”
What we’re seeing here are some of the first signs of trade policy loosening, on a domestic level. Without subsidies, farmers have less of a “safety net” in times of falling prices, and thus, must become more innovative and productive. Overall, removing subsidies helps increase food supply globally, makes markets more efficient, aids in opening supply lines (assuming protective tariffs aren’t in place) and stimulates economic growth.
Expect the Euro Area farmers to adamantly oppose the removal though, so this story is far from over.
The Bottom Line
The subsidy removal proposal in Europe is great news; now it would be nice if the U.S. would do the same for American corn producers who receive a 51-cent gallon tax credit for ethanol. At the end of the day, subsidies artificially prop up markets and cause inflation.