It has been a week of revived optimism as upbeat economic releases (better than expected productivity figures compounded by lower than expected unit labor costs and a stronger than expected rise in employment) congregated with a government plan to put a stop to the subprime hemorrhage and the near certainty of another quarter point cut next week.
These events sent global stock markets higher as the risk of a full blown recession in the U.S. somewhat receded. Oil prices dropped as tensions between the U.S. and Iran subsided and treasuries receded as the probability of a larger Fed rate cut diminished and more money poured back into stocks.
The buzz is unlikely to last very long, however, as most of the economic indicators provide a snapshot of the past making an assessment of the current state of the economy nothing more than a wild guessing game. As far as indicators go, the 3 month Libor to 3 month t-bill spread still remains relatively high, suggesting that there still remains a significant amount of distrust and uncertainty plaguing the credit markets. The subprime mess is far from being resolved and another cut in interest rates will also raise the risk of inflation in the future (as the current shape of the treasury yield curve would suggest).
