Monday, July 31, 2006

Fed's Rate Hike Over?
Finally, Something That's Flaccid & Good

Despite the non-stop shelling between Lebanon-Israel, global equity markets have been able to shrug off the repercussions. That's largely due to the growing perception that Federal Reserve have temporarily finished with raising rates. The peaking of the rate hiking cycle is significant because something that has peaked can only go down. Reason #1 for the perception - the Fed's beige book report on regional economic activity showed that economic growth lessened around the U.S. in the past six weeks, while price pressures generally remained in check The report, one of many factors the Fed uses to determine monetary policy, would seem to give another reason to end rate hikes in the near future.

Consumer spending appears somewhat weaker, while strong factory and commercial lending activity suggests business spending may be compensating for it. On wages, a growing gap between highest- and lowest-paid employees was observed, and food retailers appear stronger than restaurants in some regions, suggesting more low-income customers are choosing to cook at home rather than eat out. The report led the dollar down the Euro and Asian currencies, on concerns for a weaker U.S. economy and lower interest rates in the near future.

However, that is just one part of the equation. Having been observing the Fed and Bernanke's testimony, it is obvious that the Fed pays unusually close attention to the housing side, though they would be loathed to admit that. The Census Bureau reported that sales of new homes fell 3% in June to 1.13 million units, and sharply revised down its estimate for May from 1.23 million units to 1.17 million units. Sales were down 11.3% in the Northeast, 7.9% in the Midwest and 6% in the South, but were up 8.2% in the West. Inventories of unsold homes at end-June hit a record 566,000 units, a 6.1 month supply at current sales rates, down from 6.4 in February.

The Commerce Department reported that new orders for durable goods exclusing defense and aircraft grew only 0.4% in June, sharply lower than May's 1.3% growth. Orders for defense capital goods were up 51.2% and aircraft orders rose 8.8%, so total durable orders rose 3.1%. The Labor Department reported that claims for unemployment benefits fell by 7,000 to 298,000 in the week ending July 22. Looks like the picture is setting the US equities for a mini bull run over the immediate future.

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