Is that a Phoenix?
My suspicion is that the media is going to trumpet a slowdown during the 1st and 2nd quarter 05, this will lull many who believe in the Goldilocks scenario, into a false sense of security. Meanwhile there is underlying evidence showing potential for an acceleration, which due to latencies in the reporting mechanisms, will not be reflected in the mainstream media until after its already well under way, and much too late. Alot of people, including the bond market could get blindsided by an accelerating economy and rising interest rates.
With a sizable upward revision to Q4 output confirmed and incoming data pointing to significantly better trajectory heading into Q1 than previously expected...strength in capital goods orders was also reflected in the shipments results...investors should be more concerned about 25 bp rate hikes continuing unabated in the second half of the year than about a 50 bp move in the near term.
If the surprising strength in recent growth figures is confirmed going forward, we believe the economy could be operating near full capacity by early 2006, implying the Fed funds rate should continue to rise toward a neutral rate of 4% to 4 1/2% by year-end.
With margins of slack shrinking more rapidly than expected, and operating rates and pricing power correspondingly rising, risks are increasing that just getting to neutral won't be enough, and the funds rate may need to rise further into restrictive territory to contain rising inflation pressures.
Clearly, even after some modest adjustments over the past week, the possibility of the funds target trading above 4% by year-end and potentially moving toward 5% in the first part of 2006 is not even close to being priced into eurodollar futures or intermediate-term Treasury yields.
See: Uncle Al's Conundrum Part Four
http://naybob.blogspot.com/2005/02/uncle-als-conundrum-part-four.html
See: Morgan Stanley US Review and Preview
http://www.morganstanley.com/GEFdata/digests/20050228-mon.html#anchor3
With a sizable upward revision to Q4 output confirmed and incoming data pointing to significantly better trajectory heading into Q1 than previously expected...strength in capital goods orders was also reflected in the shipments results...investors should be more concerned about 25 bp rate hikes continuing unabated in the second half of the year than about a 50 bp move in the near term.
If the surprising strength in recent growth figures is confirmed going forward, we believe the economy could be operating near full capacity by early 2006, implying the Fed funds rate should continue to rise toward a neutral rate of 4% to 4 1/2% by year-end.
With margins of slack shrinking more rapidly than expected, and operating rates and pricing power correspondingly rising, risks are increasing that just getting to neutral won't be enough, and the funds rate may need to rise further into restrictive territory to contain rising inflation pressures.
Clearly, even after some modest adjustments over the past week, the possibility of the funds target trading above 4% by year-end and potentially moving toward 5% in the first part of 2006 is not even close to being priced into eurodollar futures or intermediate-term Treasury yields.
See: Uncle Al's Conundrum Part Four
http://naybob.blogspot.com/2005/02/uncle-als-conundrum-part-four.html
See: Morgan Stanley US Review and Preview
http://www.morganstanley.com/GEFdata/digests/20050228-mon.html#anchor3
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