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Daily Market Commentary

 This morning's Unit Labor cost (no spelling error there - it's a US number!) came in below expectations.

 

This reconfirms our view that in the shorter term, inflation is not a problem at all.  Wages and cost of workers are the real drivers of inflation.  As we have seen recently, commodities will contribute to inflation, but the real source is wages.  As last month's numbers were actually negative (i.e. labor costs dropped 1.9%) and this months were well below expectations at 2.1%, we continue to expect the Fed to drop rates even more.

 

 

Yesterday, Merrill Lynch issued a comment increasing the odds of another inter-meeting rate cut from the Fed.  They feel the Fed has fallen behind the curve (again?) and will have to cut rates ASAP.  There was significant turbulence in the markets yesterday, and you can be sure that the Fed noticed.

 

 

In the news, Toll Brothers reported their 7th consecutive quarterly drop in revenue.  Once again, this housing downturn is going to run deep and there will be at least one major home builder gone from the landscape before its over.  While it appears that inventories of new homes has peaked, and existing homes looks like it is cresting also, they are still well above normal and affordability is still below its long term average.  These will have to correct deeply to the other side of the average before this downturn is over.  The Fed will help, but only if the big banks revive their lending practices.  Given the news that is coming out from their camp, however, the prospects are not good.... ML has decided to exit the CDO and mortgage securitization markets, and in the meantime, holders of this toxic debt are starting to sue the banks that sold it to them.  (Municipalities are now suing the banks to recover CDO losses).  They won't be anxious to lend while they are getting stung for their previous mistakes.

 

 



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