Michael Gregory
Michael Gregory
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Is there a risk the Fed has tightened too much? Not with the kind of momentum we're seeing in the economy and not with consumer confidence at record highs. People are wealthier, real incomes are growing, the housing market, while slower, is still super strong and the labor market is still super tight. I don't think the Fed is finished just yet.
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Mortgage equity withdrawal (which keys off prices and rates) is going to ebb substantially and pull consumer spending growth down along with it. When it does, the Fed will pause.
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There is a lot of momentum in this economy. Consumer spending is continuing to march along, business spending is solid and you have a pick up in foreign demand.
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It's only a matter of time though before the consumer succumbs to weakening housing and higher gas prices, and I think we'll see that by the third quarter.
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Consumers may be wobbly, owing to high energy prices, a vulnerable housing sector and increasingly uncertain medical and pension benefits, but there is nothing like the whiff of solid job growth to keep them on their feet.
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We're seeing signs that consumers are starting to feel the impact of persistently high gas prices. As prices stay high we're going to see the impact broaden from discount to more mainstream retailers.
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Despite the fact that energy prices are creeping up and housing continues to crumble, surveys suggest job gains are providing an offset for confidence. The potential is there for consumer spending to remain resilient.
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There's a general consensus out there that rates are headed higher in the U.S. and Europe, but there's apprehension about it anyway, ... That affecting the euro and that's affecting the bond market.
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Do they really want to end the party? Of course not, ... They want to tone the party down before something gets broken or damaged, or worse, before someone gets hurt. It's similar to a marathon: if you pace yourself properly you can get to the end without overexertion. That is what the Fed is trying to do here.
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There's little doubt out there that Greenspan will move this time around and try to put the brakes on growth a bit. The question is whether this is a one-time deal or a continuation of a series of moves meant to really keep the economy in line.
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The trend is improving in manufacturing as businesses pick up the pace of spending on equipment, so we're looking for continued expansion in the factory sector.
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But against the backdrop of improvements in commodity prices, the fact the Canadian dollar has been rallying and the long end of the market had already priced it in, they thought, 'Listen, our rates should be below U.S. rates. Our inflation is lower and we're well behind in the economic cycle.'
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Much of the decline is disappointment among investors who were burnt quite badly in 1999 where they thought things had bottomed. You'll have to see some tougher talk from the ECB, more robust economic data from Europe and eventually a rate hike.
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This surprise rise in no way alters the broader view that the housing sector continues to cool.