Here's what we have today:
1) Fed Beige Book a little more downbeat, talking about slower growth and softer consumer, but noting that global growth remains strong.
2) Weak housing data(10 month supply of new homes).
3) IMF lowering global growth forecast (by a half point, to 4.8%).
4) Jitteriness over Turkey possibly preparing to launch anti-rebel operations in Iraq.
Put this together, and today we have:
--Weaker financials, materials and consumer discretionary stocks
--Flight to quality in the bond market, with spreads widening in credit markets
The good news here is that:
1) Despite all this hand-wringing, we are only 300 points (0.2%!) below the Dow's historic high.
2) This strengthens belief that the Fed will again cut at least 25 bp when it meets at the end of October.
While most traders believe the Fed will cut rates, there is a clear tension between the weaker economy and persistent inflation worries. Michael Darda at MKM partners says that the housing recession is likely to subtract at least 0.7 percentage points from growth in Q3 and probably Q4. At the same time, surging food and energy prices have pushed headline inflation back up to 2.8% y/y from 1.9% y/y in August.
This makes the Fed decision a little more tricky, though Bernanke has clearly indicated that he is more concerned with non-core inflation (ex-food and energy) than with the broader headline inflation.
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