Interesting commentary from Value Line...
valueline.com
Published June 23, 2006
Economic and Stock Market Commentary
Core inflation—the rate of price growth with the volatile food and energy components taken out of the mix—is now rising at a faster pace. Figures for May, for example, show that core inflation rose by a slightly higher-than-expected 0.3% at both the producer (or wholesale) and consumer levels. (Taking out food and energy, with their often sharp month-to-month swings to get the core rate of inflation also gives a more accurate trend in pricing. Core inflation also is watched closely by the Federal Reserve in formulating its policies.) The pickup in core inflation likely ensures another interest rate hike when the Fed meets next week.
We think a significantly higher rate of inflation is unlikely in the months ahead. Our sense is that with gross domestic product growth now slowing, pricing pressures will soon recede, especially for a range of commodities (e.g., oil, copper, and zinc) as they will be in less demand.
Meanwhile, economic growth is beginning to slow. Recent reports show that retail sales are now rising at a slower rate than earlier in 2006, with consumers cutting back on home furnishings, autos, and eating out, as they are forced to spend more filling up their gas tanks. Other evidence of moderating economic gains include a slowing in job growth, a flattening in industrial production, and a general decline in housing demand.
We think a moderating trend in GDP growth, rather than a major slowdown in business activity, is most likely. Our sense is that growth will ease to 3%, or less, during the current quarter. Gains in GDP that average 2.5%-3.0% are then likely in the second half of 2006 and in 2007.
Modest inflation and moderating economic growth should dissuade the Fed from raising interest rates much further. In fact, with growth likely to continue moderating going forward, it is quite possible that the Fed will halt its rate hikes following next week's probable increase.
The stock market's recent sharp reversal may have been overdone. If the Fed does, in fact, soon bring its string of rate increases to an end—or before such hikes cause undue harm to the economy—the market could be set for a second-half rebound.
Conclusion: Clearly, there are risks in the present market setting. However, there may also be rewards to come in the months ahead. Please refer to the inside back cover of Selection & Opinion for our Asset Allocation Model's current reading.
Factual material is obtained from sources believed to be reliable, but the publisher is not responsible for any errors or omissions, or for the results of actions taken based on information contained herein. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice. © 2006 Value Line Publishing, Inc. RIGHTS OF REPRODUCTION AND DISTRIBUTION ARE RESERVED TO THE PUBLISHER. The Publisher does not give investment advice or act as an investment adviser. Value Line, Inc., its subsidiaries, its parent corporation and its subsidiaries, and their officers, directors or employees as well as certain investment companies or investment advisory accounts for which Value Line, Inc. acts as investment advisor, may own stocks that are mentioned on this Value Line Web site.
EK!!! |
