Prague Twin

Saturday, December 02, 2006

Institute for Supply Management


Source: Briefing.com

The numbers speak for themselves, but if you look at the chart you will see a fairly disturbing trend. The ISM survey broke the 50 barier which is considered a neutral read. This is the first time we have seen a reading below 50 since early 2003. Foreign demand for U.S. goods remained strong at 56.9 and as the dollar continues to nosedive, (EUR/USD breached $1.33 on the news) I expect U.S. exports to benefit.

However, stocks turned down finishing a lack-luster week that started with a big drop on Monday and treaded water Tuesday through Thursday. Fidary saw a sharp drop on the ISM news, but a 100 point rally in the Dow in the last hour and a half left the down down only 27 points on the day. But more interesting to me is what is going on in the bond market. The 10-year yield is now holding well below 4.5% leaving the inversion on the curve at nearly 80 basis points.

So the Fed's job just got harder. Expectations for a rate cut are increasing, but inflation is not showing any signs of going away. Oil is creaping back up, holding above $63 a barrel, which means that inflation pressures remain. Borrowers with adjustable rate mortgages might be wise to lock in these low mortgage rates now (but don't come to me if it doesn't work out: I am not a professional), because the Fed is still unlikely to reduce rates anytime soon. Eventually, the bond market will have to recognize this and adjust.

It seems unlikely that the Fed will cut rates for an even simpler reason than inflation expectations and that is the fact that there is probably more liquidity in this market than in any market in the world....ever. This is what leading economists have said anyway.

So those of you who think that low interest rates and tax cuts which provide liquidity are the dual holy grails for a strong economy are about to find out if you are right or not.

I still say it is a house of cards.

5 Comments:

  • You know, for someone who claims to hate fear mongering, you sure don’t seem to have a problem engaging in it yourself.

    By Anonymous Arch Stanton, at 3:08 PM  

  • Does my analysis frighten you? It is only analysis. I'm not asking you to give up your civil rights or stay home under the covers, or buy duct-tape and plastic and c-rations... or....

    By Blogger Praguetwin, at 4:58 PM  

  • PT

    Not in the slightest.

    Fear mongering is fear mongering, no?

    By Anonymous Arch Stanton, at 6:20 PM  

  • Well, I'm not trying to frighten anyone. Usually fearmongering is engaged as a way to increase one's power. Also, disinformation is usually used.

    The classic example for me is overblowing the terrorist threat (for instance the one I described in the Czech Republic recently) to increase their power (and budget).

    I am neither trying to increase my power, nor am I providing false information. I am simply analysing the situation to the best of my ability.

    No fear mongering here.

    By Blogger Praguetwin, at 8:15 PM  

  • PT

    For the most part I agree with you. Could we also agree however that fear mongering also involves providing only the parts of the picture that support our own notions? (in sort of a "shadows on the cave" way?)

    By Anonymous Arch Stanton, at 2:56 PM  

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