What Japanese rate rises will mean for the US economy

Can traders be so obsessed with the Fed's interest rate decisions that they ignore the bigger picture? If the Yen carry trade ends, a lot of monetary liquidity will go with it, and this will spell further trouble for the US economy.

Stocks rallied last week when tame retail sales figures were reported (Wal-Mart's same-store sales rose only 1.2% for June, Costco reported weaker than expected June sales and Gap's June same-store sales fell by 6%) and Monday's stock market rally was apparently based on weaker than expected manufacturing activity: June's reading of manufacturing activity from the Institute for Supply Management was the weakest in almost a year.

The Wall Street Journal reported on Thursday June 6th that the rise in stock prices was due to weak economic data that indicated a slowdown in the (US) economy. The reasoning goes that a sufficient slowdown in the economy will cause the Federal Reserve to stop raising interest rates, and since higher interest rates are generally bad news for stocks, then a hiatus in rising interest rates should be good for stocks.

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