Major Market Movers

In...In...INFLATION!

The situation might get ugly now that inflation is getting to the economy and getting to it hard. After the release of the data, is the option of a rate cut back on the table? Well for starters it definitely will not be a smart one but if push comes to shove, then it could be the only way to go…

The GDP annualized final reading for the third quarter in the U.S. remained unchanged and unrevised from the preliminary reading at 4.9% marking the fastest growing pace since the 7.5% reading in the third quarter of 2003. But again the third quarter is of no concern to the Feds as they eye out now the last quarter of the year where expectations show that growth has slowed down to 1% or even lower as the housing market continues to collapse with higher prices and a weaker dollar.

The rapid growth last quarter was not balanced as it was more of a result to the increase in inventory building and a better trade balance which nearly accounted for half the growth.

In addition, the Personal consumption final reading for the third quarter showed a revision to the upside to 2.8% as expected but slightly higher than the preliminary reading of 2.7%. As for the core PCE final reading for the third quarter, it was also revised to the upside to 2.0% from both the expected and preliminary readings of 1.8%.

Now this is where the trouble comes. The Core personal consumption price index is the Fed's favorite meter! So when it comes in showing a high reading…then Houston we have a problem! Inflation is creeping up higher as core inflation now has increased to 1.9% in the past year rather than the previously reported increase of 1.8%. It is safe now to say that the Feds are caught between a rock and a hard place as they could be facing stagflation. If they do cut interest rates one more time making it an overall drag in interest rates by 1.25 percentage points, they could be in a real pickle and not be able to correctly monitor the situation.

Despite the fact that initial jobless claims is not that much of a major indicator to the labor market, but the increase in the amount of claims we witnessed in the U.S. the last week might trigger fear knowing that the strong labor market was what was somewhat providing background support to the economy. 346,000 people filed for claims inclining from the previous and expected readings of 333,000 and 335K respectively. This marked the highest level in more than a year.

In a different report the U.S. released the leading indicators for the month of November coming in at -0.4% worse than the expected reading of -0.3% but still better than October's reading of -0.5%.

This shows that economic growth is as a matter of fact weakening during this winter season especially that only three of the ten leading economic indicators inclined in November. The largest positive contribution came from vendor performance while stock prices were at the other end of the table being the largest negative contributor.

Hope is now hanging by the edge to see whether the term auction facility will ease the credit crisis in the markets. The Feds said that they might even continue after January. But if they fail and the only option is to cut rates, who knows what else could happen to the dollar. The deadline now is January 30 where the first fourth quarter reading will be uncovered…stay tuned!