Saturday, January 31, 2004

Economic Week in Review

ECRI Weekly Leading Index 132.7 -.45%

Chicago-area manufacturing expanded in January to 65.9(anything above 50 signals growth), the fastest pace since July 1994. The University of Michigan Consumer Confidence Index rose to 96.8, its highest level since November 2000. Initial Jobless claims were the lowest in a month at 341,000. The 4-week moving average of jobless claims was 346,000, holding near a 3-year low. Jobless claims have now dropped 25% over the past 9 months. 4th quarter GDP grew at a very good, but not exceptional, 4% annual rate. The Federal Reserve left its benchmark rate at 1%, a 45-year low. However, the Fed changed a key phrase in its policy statement to a promise to be "patient" raising rates from a pledge to keep rates low "for a considerable period." This change in language was viewed as a first warning of an impending interest rate hike. Inflation still remains non-existent, rising at an annual rate of .6%.

3rd quarter GDP growth of 8.2% was the best since the late 70's. Consequently, 4th quarter growth slowed to a more sustainable rate of 4%. However, the above mentioned data releases point to a renewed surge of growth in the 1st quarter. I expect the 1st quarter will surprise economic analysts by its strength. It is my belief that the Fed did not like being boxed in by its past language. Their subtle change in wording does not necessarily imply an interest rate hike is imminent. The Fed will most likely begin to raise rates when the unemployment rate falls below 5.5%. This should occur sometime during the 3rd quarter. However, with the current benchmark rate at an emergency level of 1%, it is possible that the first increase could come as early as the 2nd quarter. An early Fed rate increase could result from an increase in consumer prices(CPI) due to rapidly increasing commodity(CRB) prices or an unwanted fall in the value of the US dollar.

Weekly Scoreboard

S&P 500 1,131.13 -.91%
Dow 10,488.07 -.76%
NASDAQ 2,066.15 -2.72%
Russell 2000 580.76 -2.58%
Wilshire 5000 11,029.20 -1.14%
Volatility(VIX) 16.63 +12.06%
AAII Bullish % 56.88 -18.17%
US Dollar 87.20 +.61%
CRB 262.10 -2.02%
Gold 402.90 -1.61%
Crude Oil 33.05 -5.11%
Natural Gas 5.40 -11.23%
10-year US Treasury Yield 4.13 +1.47%
Average 30-year Mortgage Rate 5.68 +.71%