The strangle...

With signs that the low end of the housing market is capsizing and the growing risk that this will spill over into the prime market, the economic expansion seems to be increasingly on shaky ground. A scenario in which consumer spending drops dramatically, leading to a collapse in earnings and a subsequent jump in multiples is not that far fetched. In such an event, the Fed would normally be expected to start easing rates but its hands seem to be increasingly tied if recent inflation related figures are to be believed. Indeed, looking at PPI and CPI for February, or even capacity utilization and the surprising strength in industrial production, the message is pretty clear. With the Fed's hands pretty much tied, the most ideal outcome would be for the slowdown to dominate and choke off the rising inflationary pressure. How things will actually unfold is still very unclear at this stage...