As we noted earlier, this is a big week for South American inflation data, and hot numbers are expected to lead right into heightened rates or reserve requirements in the region, as dictated by various central bankers.
Of course, this is what central bankers are trained to do. They look at rising prices and they’re trained to hike rates.
But let’s walk it back for a second. The major inflation driver in much of the world is food costs.
But what, exactly, are rate hikes supposed to do about that? The only way we’re getting cheaper food is if the weather improves and more food is planted. How will higher rates accomplish either one of those things?
There is a demand element to higher food prices, but does anyone think that higher reserve requirements in China will cause consumers to trade down to chicken from beef? Not likely.
The irony is that the only central banker who seems to get this is Bernanke, who gets lambasted left and right. But he understands that he can’t tighten his way to cheaper commodity prices, and neither can the rest of the world right now
That being said, this explains nicely much of what we’ve seen in markets this year. A fairly weak dollar, a strong US stock market, and of course very weak EM stock markets.