Great News! U.S. consumer prices were flat in November. Most economists were expecting a small rise of 0.2% rise for the month. This could allay inflationary fears at the Federal Reserve. The market will now expect the Fed to focus on lowering interest rates towards the middle of 2007 and stop thinking about further rate hikes. Stocks and bonds will trade up on this news.
In other good news, the Labor Department reported that the number of Americans filing for unemployment benefits dropped for a second week. This will begin to allay another fear investors have had that the economy might cool quickly. A long gradual landing of this bull market is what investors are hoping for in 2007.
Robust quarterly profit reports keep rolling in, with Costco, Honeywell and Citigroup all reporting good news.
Consumer spending is now the worry. The economy is a three legged stool with spending by the government, businesses and the consumer. Government and Business spending is expected to be moderate. It is the consumer that has been driving economic growth. Will Americans decrease their spending as housing prices contract? Will a decrease in wealth (caused by falling housing prices) translate into consumption? Many economists and investors have been waiting for most of 2006 for consumers to feel this falling wealth effect and moderate their spending. It appears that the low unemployment rate could be bolstering consumer confidence because consumer spending has not abated. If the consumer stops shopping, then this bull market is probably over.
No comments:
Post a Comment