Prague Twin

Tuesday, August 15, 2006

Bernanke Was Right

Todays PPI and core PPI data confirmed what Bernanke said when the Fed decided to not raise interest rates a week ago. Essentially, the argument is that a slowing economy will moderate inflation. Todays data helped legitimize this claim.

First of all, PPI is the Producers' Price Index. It is a broad measure of inflation based on the producers' price lists for a given month. Core PPI is the PPI with volatile energy and food prices removed from the equation. Core PPI is considered a more accurate measure than total PPI. CPI, the Consumers' Price Index, is considered more important than PPI but it is even more backward looking as it represents the increase in prices after they have been passed onto the consumer.

Today, anaylist almost unanimously called for a .2% month on month rise in Core PPI and a .4% rise in PPI. The data was realeased an hour before the stock market opened and Core PPI came it at -.3%. Stock market futures took off on the news and the Dow and S&P moved instantly higher. The dow is minutes away from having it's first 100 point rally stand at close for the first time in almost two weeks. The dollar took an immediate .5 cent hit on the news and the Euro tested the 1.28 level within an hour. The Euro has since leveled off at 1.2785.

A good day for Wall Street, but nothing there to indicate any rally past that 11,300 ceiling is in the cards. Yes, in fact the Dow has just closed 131.99 points higher for the day at just under 11,230. If tomorrow CPI were to come in higher than expected, the bears will have a field day. It will be like salmon spawning season. Core CPI is expected to read .3%, again almost unanimously. I think that is a pretty high number so it is unlikely that it will come in over expectations, but it certainly could happen..

More likely is that is will come in slightly under, reflecting only part of the Core PPI data from today. Anything under .3% will continue the rally which would be a benefit for the market by breaking the downward treadline that is starting to develop.

Having said that, I have not heard this much negative sentiment about the overall direction of the market in quite some time. Morgan Stanley issued their most pessimistic statement in 10 years today. The Index of New Home Builders had its lowest reading in 15 years. The NY State Empire Index came it at 10.4 when analyst expected between 15 and 17.

The currency traders, who I have said before tend to be ahead of the market, believe that the pressures of a slowing economy are going to far outweigh inflation pressures in the year ahead. They believe the Fed is done raising rates for the year and may start dropping rates next year. They think that the intrest rate hikes went too far and the long term effects will start to kick in by the end of the year. They see a decline in the dollar short term, perhaps rather drastic, but a strengthening of the dollar next year when the Fed comes back into the fold. Ironically, they believe that as the Fed loosens policy, the dollar will start to gain strength as the market recovers, which has happened before.

I've been calling for a correction for quite some time: pre-maturely as it were. Today I heard a technical analysist who is considered a guru to say the least say the he expects a 25% correction in the stock market by the end of the year.

"If lovin' you is wrong, then I don't want to be right."


  • CPI up 0.4, CPI core rate up 0.2. Stocks set to soar again today.

    Underpinning all the celebrations on Wall Street is the housing market, however. Sentiment among homebuilders is at a 15 year low, U.S. homebuilding starts fell more than expected, and exisiting home prices have actually fallen slightly in some markets (I think I saw that story on the LA Times but I don't have the link). Yesterday on CNBC, I saw a segment where a real estate analyst said we're kidding ourselves if we think the real estate market is in for a soft landing.

    I dunno, but it is something to think about while Wall Street cleebrates a slowing economy.

    By Blogger reality-based educator, at 3:26 PM  

  • Once the market finally decides that rates are on hold for good, there will be little to celebrate. Stock market is up 50 points and looking for another 100 point gain day. That will be the end of the party in my view. It will have to contend with that 11,300 barrier I keep talking about.

    CPI numbers are pretty much what I expected.

    The housing numbers all over are starting to really get interesting. I expected a drop, but the year average being down 100,000 was even more than I thought.

    By Blogger Praguetwin, at 6:08 PM  

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