VitalAccurateThinking

Economic News 1-Aug-06

Today's news bring more data to suggest inflation is heating up. The stock markets (correctly) took this as a negative sign that the Fed will continue with its rate hikes, as I predicted here.

Heightened fears of inflation sent stocks sliding for a second straight session Tuesday as a key price index climbed to an 11-year high and an improving manufacturing sector raised the likelihood of another interest rate hike by the Federal Reserve. Tech shares and small-caps were hardest hit.

While inflation-adjusted consumer spending rose 0.2 percent in June, the Commerce Department also reported that consumer prices are up 2.4 percent year over year, the highest rate of inflation since April 1995.

The Fed meets next Tuesday to gauge whether more interest rate hikes are needed to clamp down on inflation. The Commerce and ISM reports could push policy makers toward another quarter percentage point increase, which would put the benchmark rate at 5.5 percent. That would make capital more expensive for corporations -- and hurt corporate earnings and share prices.

The Fed will tighten next week. You can bank on it.

What really baffles me is the downward movement of the 10 year treasury to be again below 5%. That is counter the inflation news and expected Fed action. It makes no sense to have a Fed Funds Rate at 5.25% and the 10 Year Treasury below 5%. That is called an inverted yield curve folks.

posted by Jim VAT @ 5:58 PM