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Stay the Course - It Worked Before - Right?
By Jon Nadler

Milestone values and/or breakouts were recorded overnight and partially into today as well, as the US dollar went into uncharted territory following yesterday's economic data. Today's testimony by Mr. Bernanke in front of the US congress probably felt about as pleasant as waterboarding as he tried to explain the current state of the economy and sell his strategy for fixing it. It appears that measures taken thus far are starting to take on the feel of the 'stay the course' policies used to address other kinds of problems. See the last paragraph about what he said or implied. We already know how the markets treated his words.

In quick order, a run-down of today's market values and changes: Oil surged past $102 per barrel, pulled back to under $100 and was last seen near $101. Inventories are fine, thank you. Hedge funds on the other hand, are...hedge funds. The euro rose to above $1.51, the loonie to above $1.02, and gold reached for a high of near $966 before running into resistance and scaling back a bit. Many an objective has been achieved by the latest meltup/meltdown and players will now likely take stock and decide whether to leave well enough alone or throw more money at red-hot markets. Questions about tipping points are flooding various forums.

New York spot bullion was still in hyperdrive at last check, rising $8.80 at $957.50 per ounce, as participants took the Fed chairman's testimony at face value and rechecked the 'rate cut coming' box with a heavy chalk mark. The greenback was close to 74.25 on the index while crude oil slipped back to just under $101 per barrel. Silver was ahead by 46 cents at $19.17, while platinum lost $20 at $2129.00 but palladium showed a $13 gain at $547.00 per ounce.

Platinum fell victim to today's poor durable goods orders figures, as speculators began pondering what happens to the metal's high-flying values when carmakers demand less of it and/or run to palladium as a cheap(er) substitute. Fund money however, continues to pour into many commodities as there are few appetizing investment alternatives to consider at the moment. Euroland is very likely squirming at the potential future economic fallout brought on by its superhero-strong currency.

If you thought the metals and energy markets were running amok, take a look over at the part of the market that occupies itself with predicting inflation and what may be done about it. Marketwatch's intrepid Laura Mandaro reports that:

"In the futures markets, odds fell to 88% that the Federal Reserve will cut interest rates by 50 basis points to 2.5%, when it meets March 18. The drop followed the Labor Department's report on wholesale inflation, which jumped more than economists had generally anticipated. The rise reflected higher energy, food, drug and car prices, and compounded concerns that slowing U.S. growth isn't cooling inflation.

"It's a combination of inflation numbers and economic data, which while weaker, has been a little mixed," said John Canavan, analyst at economic research firm Stone & McCarthy, about the drop in rate-cut views, which have eased after peaking earlier this month. Surprise bursts of inflation generally dampen forecasts for Fed rate cuts because they are seen curbing the Fed's ability to engineer looser credit conditions. Federal Reserve policy makers frequently note the importance of keeping inflation expectations, in addition to actual inflation, at bay.

After the Conference Board released its mid-morning survey on consumer sentiment, the implied odds for a March 18 rate cut bounced back to 96%, as priced in the April fed funds contract. The report showed consumer confidence drooping to a nearly 15-year low, excluding the start to the 2003 Iraq War. Consumer expectations dropped to a 17-year low.

Further in the future, traders adjusted their views on when the Fed will start raising rates next year. The implied fed funds target rate priced in Eurodollar contracts for March 2009 rose after the inflation report came out and then slipped after the Conference Board reading.

"These contracts indicate the market expects rate hikes next year," said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co. "That view was fortified after the PPI," he said, but then withered after consumer sentiment results."

For the moment, such reversals are obviously something to consider as not imminent. Perhaps in the second half of the year. To wit, today's testimony by Mr. Bernanke. Marketwatch relays his story as follows:

"Federal Reserve Chairman Ben Bernanke told Congress Wednesday that the central bank will remain on the course for additional rate cuts at least in the near term. Downside risks to growth remain the key focus of monetary policy, said Bernanke. Testifying after inflation readings for January showed rising prices, the Fed chairman acknowledged that inflation risks have increased, but he did little to alter market expectations that the Fed will choose to cut rates again at the next meeting on March 28."

Today, the Oscar for best contribution to a financial headline by a layman, is a comment/explanation of precious metals price rallies on Marketwatch by one "Caribbean Jim":

"I will bet you Bernanke and his cronies have a massive stockpile of gold and silver. There really is no other good reason why Bernanke should be cutting interest rates at this point."

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