Gary Thayer
Gary Thayer
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The bond market liked the inflation data. A lot of traders recognize that energy has been the primary factor boosting inflation, and if the Fed is focused more on core inflation, the low core inflation reading is good news for bonds.
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The Fed will probably hold rates steady at a low level as long as they can. And I think as long as the unemployment rate is rising, they'll maintain a policy bias toward weakness.
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The upturn in confidence is an encouraging sign that economic conditions are stabilizing after the hurricanes. Lower energy prices are helping, but the upturn in employment is also a plus.
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Companies may be paying more for raw materials and energy, but that is at least partially being offset by lower unit labor costs. That, I think, is likely to keep inflation contained.
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It shows that consumers are feeling poorly about the economy, similar to what we've see in other recessions. Confidence is not as low as it was in the recessions of the early 1990s and early 1980s, but it is dropping in response to the worsening employment situation and the concern about the terrorism threat.
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The good news is that what we've seen is an unchanged reading for the nonpetroleum items and it looks like what we're still seeing is lower prices for many consumer items.
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We still have a very weak world economy, despite the fact that the U.S. economy is still doing pretty good, ... We're seeing lower prices basically because there is more production out there than demand.
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The employment component was just a tad lower than what we saw in November so it's still a healthy number.
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Inflation is creeping up, but it's not out of hand. I think that's pretty important. The bond market may have discounted a worst-case scenario over the last couple of months on inflation, and now maybe traders won't have to worry about the Fed moving too fast.
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It's still a good reading overall, but not quite as robust as we've seen in the last several months. The encouraging thing is that the employment component increased again. We are beginning to see businesses becoming a little more willing to hire.
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It's sort of a good news-bad news situation though, because if it gets out of hand, it can create other problems for the economy.
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The big number is the employment number on Friday. If that number comes in weak for the third consecutive month, views on the Fed are likely to change significantly.
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The bond market had been thinking that the weak economic numbers that we've seen would cause the Fed to think twice about raising rates,
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These numbers show the economy is indeed in recession, and they leave the door open for the Fed to cut rates again.