Last Week’s Highlights:

Stocks:                                Correct on GE Earnings

Bonds:                                10-yr starts to lift – 3.7%

Oil:                                     New highs above $115

Dollar:                                Weakness then stability at 1.58

Retail Sales:                        Slight uptick from gas sales

PPI                                     6.9%, 2.7% core

CPI                                    4.0%, 2.4%

Economics This Week:

Date       Item                                   Est.                       Comment

4/22       Existing Home Sales         4.9M                     Down

4/24       New Home Sales             585K                    Down

Did you happen to see the inflation data last week? With PPI now on the verge of 7% and CPI at 4%, even holding your hand over one eye can’t shield you from the fact that low (but rising) core inflation isn’t helping any of us.  With oil now heading to $120, after firmly setting the stage at $117 this morning, the cost of doing business in the US and the world is simply getting more expensive. Remember the good old days when oil was just $90 and you could fill up the car for $50?

Retail regular gas is now at $3.50 or higher in most major metro areas, and talk of $4 per gallon by the late spring is already being discussed. Anybody thinking about walking to work yet? At a time when economic conditions are slowing, we all better hope the export rally continues to float the US economic boat through this storm. And speaking of storms – last week most major airlines again raised airfare to cope with rising fuel costs, while others simply go out of business. I’m sure after 3000+ cancelled flights at American, things can’t be so comfortable on the cash flow side (was it ever?).

The bottom line is that, on April 30, we get the first look at Q1 GDP. Most suggest it will be a flat to slightly higher number, almost solely held up by the surge in exports.  However, none of us need to wait until the end of the month to know that an economic slow down, like inflation, is already here. In our neck of the economic woods – financial services – jobs are being cut by the thousands. Last week’s announcement by Citigroup of 9,000 layoffs is just one in a string of financial downsizing now taking place. 

As a perpetual optimist, I don’t like thinking so bleakly about the economy or about the financial markets. We all remain encouraged by the accommodative policy of the Fed but, at some point, lowering rates turns into the proverbial “pushing on a string”. It’s this end point that has lots of economists worried that inflation will be the next challenge on the Fed’s doorstep. The aggressive push for liquidity has clearly stabilized the market and brought some semblance of balance to the market, but these things always come at a cost. That cost is already being seen in oil prices pushing higher, the dollar lower, and inflation on the rise. Yet, remarkably, the 10-yr Treasury yield remains very low. Is it that the “flight to quality” trade is that strong? It’s a tough call, but the flight out of other non-Treasury debt has been so pervasive that it’s no wonder yields are so low. And speaking of rates…

Fed Talk – 25 bps Then Done?

The FOMC will meet on April 30 to decide on policy. This time around the market is pricing in just a 25 bps rate cut, from 2.25% to 2.0%, after the big 75 bps cut on March 18.  Interestingly, when one looks out to the fall, rates are being priced to rise, suggesting the Fed’s course is about to make a change. Not sure if this is a reaction to sharp rise in inflation data last week or a true belief that the Fed is nearing an end to the liquidity cash bar it has been serving up since last summer. Then again, with the Fed funds rate heading for 2% this month, how much can they really cut after that anyway?? I guess the Fed could just hand it out for free – you know, kind of like the fiscal rebate checks coming next month. Ok, ok, I promise to be more optimistic and a bit less cynical next week!

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