Prague Twin

Wednesday, September 06, 2006

Hold the Phone!

Breathtaking. That is how the Unit Labor Cost figures released today have been described. ULC for Q2 was expected to rise 4.0%, however it came in at 4.9%. What was truly breathtaking is that Q1 ULC was revised up to 9.0% from 2.5%. Currency traders are having a bit of a laugh at US Treasury economists citing 300% revisions as the norm.

So what does this mean? ULC is the final piece in the inflation puzzle. It starts with producer prices (PPI), continues with consumer prices (CPI) and finishes with labor costs (ULC). When the cost of labor goes up quickly, economist say that we are at the end of the economic cycle.

These numbers have cast doubt on the Fed's likelihood to stay sidelined. Wall Steet is about to open and I would expect there to be some losses today. It has been a hell of a bull run for the last month so a correction is in the cards anyway.

Let's see if today's ULC numbers frighten investors.

UPDATE: The Dow is down nearly 50 points in the first 5 minutes of trading.

UPDATE 2: The Dow closed down 63 points to just over 11,400. Back to school means back to work for traders, and so far it has been caution and profit taking. Apparently, this is normal for September and we should expect more of the same. Today's was a healthy correction, but a bigger one is definately in the cards.

Interesting side note: oil droped to a 3-month low settling in New York at $67.50 per barrel. Looking at the oil chart a couple of months ago I figured the $65 as the bottom on corrections. This seems like a logical correction from the new high set a couple weeks ago. Should it drop below $65 I will be officially suspecting an October surprise.

7 Comments:

  • I'm so dim about economics. Are you saying that these extraordinarily revised figures means the feds will bump up the rate a 1/4 next meeting? I think you say that, but I can't tell.

    By Blogger Roger Fraley, at 2:58 AM  

  • The Fed is not going to bump at the next meeting unless the CPI and PPI data next week are outrageous.

    What these numbers do is increase the likelihood that the Fed will bump by the end of the year. Thus, you have a correction because of speculation.

    It is a murky picture right now so each piece of data is scrutinized.

    By Blogger Praguetwin, at 9:26 AM  

  • The wingnuts say a conspiracy among oilmen to lower the cost of oil and gas before the November midterms is impossible. The market sets the price.

    Uh, huh.

    PT, when do you think the next rate increase will come - in october or November?

    By Blogger reality-based educator, at 1:49 PM  

  • I figure October. I don't think they will raise in September but I still hold it as a possibility if the numbers warrant it.

    The housing numbers still look bleak. I forget the name, but the major organization of American realtors reported today that new home sales are down over 16% from last year.

    I think the decision for the Fed is going to get harder and harder. With $500 billion in ARMs coming up this year and $1 trillion the next, continued rate hikes spell disaster for the major consumer block which drives the whole economy. On the other hand, inflation is not going away.

    What to do?

    I say they pause twice here, raise once more in October with some pretty clear signals that this is the end, and then start lowering next year, hoping inflation takes care of itself somehow in the meantime.

    Hoping beyond hope perhaps.

    By Blogger Praguetwin, at 7:48 PM  

  • On the oil, I tend to agree except for one thing. There are tankers lined up in Saudi Arabia and in the states. In SA it is pretty well known, but in the states it is an unverified rumor. Conceivably, what is on the sea can be manipulated to effect inventory data which plays in the price. But yea, at the end of the day, like most things, the traders control it.

    Having said that, if you have enough money you can manipulate any market, to a point. It depends on how much you have. These guys have a lot, so they probably could, but I bet if they did this time they would get caught. I need to look into what BP is being charged with because it has to do with manipulating markets and prices. So the wingnuts say it is impossible, but then BP is on trial for doing it.

    If we drop below 50 it stinks to high heaven, and it certainly won't last.

    By Blogger Praguetwin, at 7:55 PM  

  • But will the voters believe that or be gulled by short term comfort?

    By Anonymous cartledge, at 9:28 PM  

  • Gulled.

    RBE, I just realized that you asked with regards to the election and I am thinking purely in economic terms.

    If we get big inflation numbers and they don't raise, the gig is up.

    By Blogger Praguetwin, at 9:35 PM  

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