Wednesday, January 31, 2007

Morning Market Comment 1/31/07

Gross Domestic Product in the 4th quarter came through at a stronger than expected 3.5% and consumer prices (the deflator) fell by .8% for the first quarterly drop since 1961. Core PCE rose 2.1% excluding volatile food and energy. What's interesting is that the big improvement in GDP came largely thanks to a drop in energy prices which improved the inflation picture and even the trade imbalance picture. In a seperate report, the Employment cost index rose a smaller than expected .8%.

This data gives Fed policy makers something more to chat about during day two of their get together. 2:15 will be the usual announcement time. No rate move is expected and given the strength in this morning's figures you can bet the Fed will continue to sound a cautious tone that it's concerned economic strength could accelerate inflation, or that no one should expect a rate cut anytime soon. However, the warning signs have been popping up. If a guy like Jamie Dimon, which we noted last night, is talking about financial distress that a big group of borrowers are going through, Fed policy makers no doubt are thinking about the issue of a credit crunch somewhere down the road as well. So while it is likely the Fed will strongly imply that no rate cut is in cards for the next two quarters and could threaten a rate hike, I remain convinced that the Fed cannot lift interest rates later in the year unless the ugliest of scenarios develops where inflation really perks up, and that indeed would be a very ugly situation. The present rate raising camp is also the largely bullish, cheerleading stock market bunch. IF the Fed is forced to lift rates later in the year, it won't be for bullish reasons.

The other big event on the calendar is Google and its earnings. Implied volatilities are, well implying, that the stock could move $30 or more this evening. Which way? Citi's analyst thinks GOOG will actually miss - say it aint so! But the Journal's "Ahead of the Tape" column says analysts surveyed by Thomson by and large think the company will handily beat with a 90% jump in earnings as Microsoft and Yahoo continue to suffer setbacks in their web search ad businesses. Anyone have an opinion on GOOG, or care to share what they're planning to do? Please do so in the comments section. I will probably stay off to the sidelines. The blogger Option Pundit has some interesting Google thoughts:

Heading into the open, this morning's data is actually strong enough to keep the market concerned about interest rates. Remember, the Fed doesn't have to lift the short end; the long end can move higher and negatively impact stocks. The 10 year treasury is down 6/32nds. Stock futures are lower.

A bright spot in Dow: Boeing. The stock is up 3%. Quarterly profit more than doubled and the company lifted in 2007 outlook.

Time Warner earnings merely matched estimates. The stock is down 1-1/2 percent.

After yesterday's surge, crude and nat gas have eased off just a bit. 10:30 inventory release for the liquids will determine if the barrel market can go even higher. Gold continues to mark time at just above the $640 level. EuroFX down 19 points.


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