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18 April, 2007

A Goldilocks day

A lot of focus went into yesterday's economic releases mainly due to the fact that it would provide clues as to the direction of the U.S. economy, more specifically as to whether the economy is heading towards stagflation (slowdown in growth combined with pricing pressure) or towards the ideal "Goldilocks" environment (moderate growth with inflation buried well into the comfort zone). The figures turned out in favor of a "Goldilocks" scenario with core CPI slightly below expectations and the housing market coming above expectations. It is clear that due to the innate volatile nature of housing which, amongst other variables, is very sensitive to changes in the weather, the current releases should be taken with a grain of salt. Also, although the latest inflation readings spells short term relief for the Fed, it will take several occurrences of lower than expected price releases for the Fed to start putting its guard down.

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