Last Week’s Highlights:

FOMC:                            Fed shifts gears

GDP:                                 +1% -- The great recession escape

Consumer Conf.:           Continues to fall

Stocks:                               Dow continues retreat, down 500 for the week           

Bonds:                               Yields rally on stock news

Oil:                                    $142 – Records continue

Gas:                                   $4.10

Dollar:                               Showing weakness at $1.57 vs. the euro

Leading Indicators:        Small upswing in data

Economics This Week:

Date      Item                                  Est.                     Comment

7/3        Employment                    5.4%/-50k         Some improvement expected

Shortened trading week due to the July 4th holiday

The good news last week was that final Q1 GDP ended at +1%, which suggests the economy may have escaped a recession (at least by the numbers). Indeed, the Q2 and Q3 GDP is now expected to move higher, possibly to 1.5% each quarter.

The bad news last week was the market really didn’t care about the economy, or at least an economy in the rear view mirror. What the market did care about in its 500 point slide, was a shift in the Fed and, of course, the oil price records of the week. First, the FOMC decided last week to leave interest rate policy unchanged, for the first time since last summer. It kept the fed funds target rate steady at 2%. The fed fund futures now suggest a 30% probability of a rate hike in August. The minutes of last week’s meeting reiterated what just about everyone already knew – that inflation concerns have risen. As we have said countless times in this column, it doesn’t take an economic genius to recognize inflation and that the magic, moderate “core” rate of inflation isn’t what people live on day-to-day. 

The Fed’s signal is now loud and clear – it will fight on the inflation front as the second leg of its unprecedented liquidity give-away to keep the financial world afloat. As you know, the markets didn’t exactly like the news from the FOMC and combining that with oil prices lifting through $140 per barrel didn’t help – “To Infinity and Beyond,” said Buzz Lightyear !

What seems to have given the equity market a case of Bear-sion Ivy (hey it’s summer…I couldn’t help it!) is the significant loss in consumer confidence and the acceptance that the inflation front will not get better any time soon. Even if we were able to drill in ANWR, or offshore in California and Florida, the actual online fuel supplies are years away.   Couple that with the fact that gasoline demand is declining in the US and oil supplies are on the rise (you’d think lower oil prices, right?) and you come to the conclusion that speculators and investors alike are using oil as the hedge du jour. 

This means that trying to determine some “fundamental price” on oil is both an academic exercise and a losing game. Most oil economist suggest that the fundamental price of oil should be somewhere between $60 and $90. We’ll look at this measure in the coming week.  

Until this market calms down and embraces the actual good news on the economy, equity returns will remain under pressure and bond yields (flight to quality yet again) will probably trend lower. So much for a fun summer of low volatility and sleepy days in the Dow.

Lighter Side:  The world of economics is always “relative!”

Source: Internet

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