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I expect no rate cut from Fed and good newsa to continue
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I expect no rate cut from Fed.I see market conditions are well enough to avoid a rate cut in the wake of inflation.The markets are interpreting bad news as good news and good news as good news for the last 2 weeks.Why don't we continue like this? It is possible for this week,too.
Wall Street ended its second straight winning week with a moderate advance Friday, overcoming concerns about consumer confidence and inflation.After slumping early in the session in response to weak consumer confidence and a spike in oil prices, investors seemed to turn their attention to broader signs, including the week's generally satisfactory earnings reports, that suggested that government efforts to steady the economy appear to be working. That shift in focus sent stocks up late in the day.
Although the Reuters/University of Michigan consumer sentiment index came in with its lowest reading since the early 1980s, companies' first-quarter reports convinced investors that overall, things aren't all that bad.
The consumer sentiment index fell to 62.6 for April from 69.5 a month earlier, reflecting Americans' concern about rising energy and food prices.
While consumer spending represents about 70 percent of the economy, it might be wrong thing to be looking at to gauge the prospects for the Standard & Poor's 500 companies.
Growing relief that the global economy has so far escaped the worst case scenario from the eight-month-old credit crisis has stabilized financial markets. World stocks, as measured by MSCI, are hitting three-month highs and pulling the dollar off its March record low against major peers.
Many central banks, faced with the twin problem of the credit crisis and rising prices, have cut interest rates to ease the flow of credit, leaving inflation issues for tomorrow.
However, the relentless surge in resource prices from oil to rice and the resilience of emerging economies risks are turning inflation into the bigger worry for policymakers and asset markets.
Japanese inflation, which hit a decade-high in March triggering one of the biggest ever sell-offs in yen bonds on Friday, is a case in point.
Equity markets will rally for a limited period of time on belief that weakness in earnings will be short-lived. Moving into next year, you will see markets come off on the inflation story. Investors who see some of the rise in earnings being driven by inflation generally take the view that's not sustainable.
During the last inflation crisis of 1970-1980, only a handful of asset classes gave positive real returns, including banks, basic resources, energy and industrial goods equity sectors, physical oil and physical commodities.
During that decade, the S&P 500 index's price earnings ratio fell as low as 7 from a high of around 18.
Although the picture is distorted this time by the weakness of financial firms, Bond estimates the P/E ratio could fall to around 13 if U.S. inflation expectations fire up.
According to I/B/E/S data, the 12-month forward P/E ratio for the S&P 500 index stands at just below 15, compared with around 16 before August.
The Reuters-Jefferies CRB Index of 19 commodity markets hit an all-time high this week, up 50 percent since early 2007, driven largely by strong demand from emerging economies.
The credit crisis is a Wall Street or City problem but commodity prices are the problem in the high street. It will invariably affect both consumer and corporate spending.
Rising energy and food costs are already weighing on consumer and business morale, especially in the euro zone where shoppers have started to scale back spending.
Euro zone inflation hit a record high of 3.6 percent in March while Bank of England officials have warned on inflation, which could exceed 3 percent later this year -- both well above the central banks' target levels. The Fed's preferred measure of inflation, stripping out food and energy, is running at 2.5 percent.
Of sectors which typically outperform when inflation expectations rise, State Street says institutional investors are already buying the consumer discretionary sector and flows momentum is improving for industrials, materials and IT.
Flows into consumer staples, utilities and health care -- sectors which typically underperform in times of higher inflation expectations -- have become more negative. |
| Tarih
: 4/28/2008 |
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© 2006 Mert TOKER All Rights Reserved. |
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