At the moment, the Fed continues to be more concerned with growth in the economy than inflation, and this became even more evident with the decision to further cut rates. We continue to keep an eye on the inflation posture as a result of high and rising energy and food costs. The trends in several commodity markets are clearly intact, and pointing to higher prices. For this reason, the Fed decision was not unanimous to cut rates.
Even though inflation is increasing, consumers continue to shop, which is curtailing some of the market's immediate concern of inflation. The most recent Johnson Redbook retail sales report showed an increase of 1.9. The biggest area of concern in the retail sector appears to be big box shopping. The market is already speculating that the holiday shopping season will be very weak, as a result of higher energy and food costs. As a result of the weaker housing numbers, it is no surprise to see durable goods orders lower as well. Durable goods orders came out down 1.7% vs. an expected increase of up 1.5%. The August durable goods orders were also revised lower to down 5.3% vs. 4.9% lower.
By first glance, the monthly unemployment report came out much better than expected-with an increase of 166,000 non-farm payrolls. According to Dennis Gartman, editor of The Gartman Letter, the report was actually much weaker than expected-when further analyzing the details of the report. The increase is part of the "establishment" survey. The household survey showed a decline of 250,000 jobs. Dennis Gartman believes that the household survey has historically been a much better indicator of the jobs environment. And with such a large increase in non-farm payrolls, the household number might explain why the unemployment rate remained unchanged.
Although the recent drop in the stock market (attributed to several lower earnings reports released recently) has rattled consumer confidence, the stock market remains in a long-term bullish trend. The stock market continues to rebound off of the expectation that the Fed will continue to cut interest rates. The rate cuts might provide temporary relief to the economy-and most notably, the stock market. However, it is questionable as to how it will effect the market longer-term. The more aggressive rate cuts are not indicative of a healthy economy. We are also uncertain if further credit crunch surprises exist similar to the recent losses of Merrill Lynch and Citi.
Fed Watch:
The Federal Open Market Committee meeting announcement on October 31st came out as expected, with a 25 basis point cut in the Fed Funds rate as well as Discount rate.
Technical Update:
Near Term Trend: Higher
Long Term Trend: Higher
Support: 110-02.0, 109-11.0
Resistance: 111-09.0
The longer-term trend is clearly higher. I am a little concerned that the momentum has been declining as the market has rallied. I believe the momentum has been declining as a result of increasing concerns over inflation in the market. As inflation continues to increase, the odds of future rate cuts might deteriorate.
Upcoming Key Reports:
11/7/07 -- Productivity & Costs -- 7:30 am CST
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11/8/07 -- Weekly Jobless Claims - 7:30 am CST
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11/9/07 -- US Trade Balance-7:30 am CST
11/14/07-- Business Inventories - 7:30 am CST
PPI - 7:30 am CST
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11/15/07 -- CPI - 7:30 am CST
Weekly Jobless Claims - 7:30 am CST
Real Earnings - 7:30 am CST
API/EIA Energy Stocks - 9:30 am CST
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11/16/07-- Capacity Utilization - 8:15 am CST
Industrial Production - 8:15 am CST
11/20/07-- Housing Starts - 7:30 am CST
Jobless Claims - 7:30 am CST
API/EIA Energy Stocks - 9:30 am CST
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