Interest Rate Update: FED stops lowering

FED kept rates steady last night, ending a downward trend bias we’ve had since the mortgage crash last year. On the Bloomberg Commodity Page, we see selling on metals and energy futures:

Of course one day does not reverse a trend, but this reaction is an important indication that the run up in commodity asset prices have been speculative in nature: traders have been using commodities as a hedge, not really against inflation, but more against the losses in stocks and mortgage assets.

We’ve also been talking about interest rates lately. From the chart below, we know that the FED rarely overturns a previous decision in consecutive meetings, but policy is fairly consistent every time a change happens. It’s been down for the past few meetings, now a flat policy trend is emerging, and with inflationary threats brought about by the surging commodity prices, eventually it will be an upward bias.

For stocks, the issues now that liquidity problems have abated, focus will shift back to corporate earnings–and how (a) companies will be dealing with higher production costs, and (b) consumer spending and consumption will be affected by higher prices of goods.

However, for me a significant driver will be how large hedge funds and institutional speculators will begin reallocating assets differently because of the change in the interest rate trends and for inflation. Eventually the dollar will have a bounce, and this will trigger movement in capital from where it is now (commodities) towards the other battered assets. Currencies which have also been strong recently against the falling dollar are poised to retrace some of their gains. All these movements are simply tracking the movement of capital back and forth from where the profits have been exhausted to other sectors that look promising.