Wednesday, May 16, 2007

Reasons to Feel Good

Since my last post we've been treated to a few "bright" spots in some recent economic indicators.

First of all, as I've reiterated dozens of times............inflation was not and is not a threat. The Fed should be preparing to cut rates to meet the market . Though they will continue to talk big, I see rate cuts coming starting in Q3.

Here are the recent numbers on our tame inflation picture:

May 11th - Core PPI - Expected: .2% - Actual .0% - that's right nada

May 15th - Core CPI - Expected .2% - Actual .2% - with the 12 month number at 2.1% - just a rounding error from the Fed's "comfort" level.

Excerpt Regarding Inflation from May 15 WSJ -

"Early Tuesday, the Labor Department said the April consumer price index rose 0.4%, but the core CPI, which excludes volatile food and energy prices, advanced just 0.2%. The data, which largely matched Wall Street forecasts for a 0.5% CPI increase and 0.2% core rise, suggest inflation remains tame. That reinforced a growing belief among investors that Federal Reserve policy makers will cut rates later this year.

"I read [the CPI data] as very bullish for the economy," said Timothy Rogers, chief economist at "I suspect that the reasons for the Fed to tighten [credit by raising interest rates] have largely disappeared." Mr. Rogers expects central bankers to cut their target lending rate by a quarter percentage point in the fourth quarter.

Lower interest rates make borrowing cheaper and spur investment, so hopes for lower rates tend to boost stocks. However, they can also fuel inflation, which until recently was higher than the Fed's supposed comfort zone. Now that price growth seems to have slowed, the Fed may feel freer to soften its vigilant stance on inflation and perhaps even cut rates.

In addition, a Fed reading on the health of the New York manufacturing sector met expectations, increasing from April and signaling a possible rebound in manufacturing overall."

And last but not least the backbone of our economy retrenched in April. Industrial production knocked the cover off the ball today coming in at .7%, significantly higher than the .2% expected.

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