Buy real puts not Bernankes!

18 September 2007 By Martin Hutchinson

The FOMC s 0.50% cut wasn t justified by market turmoil. With the dollar weak and commodity prices soaring, it risks reigniting inflation. That suggests Ben Bernanke thinks the economy is really weak. In which case, this Bernanke put will only work shortterm.

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The Federal Open Market Committee voted unanimously on September 18 to cut its target Fed funds rate by 0.5 percentage points to 4.75%, and the discount rate likewise to 5.25%. The accompanying statement said: Today's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets. It added that readings on core inflation had improved modestly this year, but that some inflation risks remain.

The Producer Price Index for August was down 1.4%, largely due to a drop in finished energy prices; the core PPI was up 0.2%. Both the core and reported PPI were up 2.2% on August 2006. The National Association of Homebuilders' Housing Market Index fell 2 points to 20 in September, down 16 points since March and matching the alltime low for the index set in January 1991.

Long term international capital flows into the US dropped to $19.2bn from June's $97.3bn.

Nonfarm payroll employment declined 4,000 in August according to the establishment survey. Total employment declined by 340,000 according to the household survey.

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