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Central banks at a dead end

With the Fed reluctant to launch more QE ahead of the elections and the ECB likely to stay out of the scene due to Spain’s unwillingness to cede sovereignty, markets are waiting to see if the PBOC will take step of monetary easing. With the recent CPI figure from China dropping to an about 30 month low, hopes that the PBOC would opt for more interest rates cuts were dashed. When it comes to China and monetary easing there is one thing that one should always keep in mind: food prices. In a country, where the food price component accounts for more than 30% in the CPI calculations (as opposed to its US counterpart, a mere 7.5%), the risk of sharp rise in food prices slipping into inflation is very high, especially if once considers that due to the Chinese domestic flooding and the US drought soy prices are already set to surge. Despite the fact that the ECB, the Fed and the PBOC have their hands tied, the markets are funnily enough hoping and praying that central banks will intervene at some point to save the day.
Dafni Serdari

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