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US Stocks Outlook: Investors Jittery On Uncertainty About Rates January 5, 2007

Posted by notapundit in Economic News.
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NEW YORK (Dow Jones)–Indecisive investors trying to reconcile conflicting pieces of data and divine the direction of the economy and interest rates pushed the major stock indices sharply down on Friday.

The most immediate catalyst was a stronger-than-expected jobs report. The better-than-expected numbers on December nonfarm payrolls growth had positive implications for the economy. But investors chose to focus instead on a greater than expected increase in hourly earnings – which could push inflation higher and lower the chances the Federal Reserve Board will lower interest rates in early 2007. Adding to those worries, minutes from the Fed’s latest interest rate meeting, released mid-week, indicated that inflation was still policy maker’s dominant concern.

The Dow Jones Industrial Average is currently down 80 points to 12401.

“Wall Street is waking up with a little dose of reality that the Fed may not be cutting rates as soon as everyone had thought,” said Fred Dickson, chief market strategist at D.A. Davidson. Dickson, and others, said hopes for a Federal Reserve interest rate cut in 2007 was a big catalyst for last year’s market rally.

Just before Christmas, Fed funds futures were indicating that rates would be eased by summer. After the release of Friday’s jobs data, Fed fund futures for February were unchanged, but contracts for March and upcoming months reflected reduced expectations for rate cuts through mid year.

Inflation isn’t the market’s only concern. Even though the jobs report pointed to economic strength, recent comments from Fed officials pointed to continuing uncertainty about economy. Federal Reserve officials last month saw greater downside economic risks to the economy, citing a housing sector that weighed “heavily” on activity, according to the Fed’s minutes. The stock market is now trying to make sense of these conflicting pieces of information.

“The market right now appears to be very confused,” said Dickson. “We are seeing knee-jerk reactions to each piece of data coming through as there is confusion about the degree of the economic slowdown and the timing of the next Federal Reserve action.”

Dickson said investors are unwilling to go on a buying spree in the midst of this uncertainty and are waiting for the fourth-quarter earnings season to get better clarity on the economy and corporate profits.

Some strategists even see the prospect of a rate hike given this week’s events, the Fed’s hawkish tone in minutes from its last meeting and December’s strong employment report.

“The average hourly earnings number in particular, coming in higher than expected, are spurring concern about inflation and that could actually raise concerns the Fed will raise rates,” said Alan Gayle, senior investment strategist at Trusco Capital Management.

“The market is going to continue showing a lot of volatility because of this,” said Gayle. “Investors had already priced in a lot of good news and now we’re in a what’s next mode.”

That uncertainty could be very wearing.

“Any strong economic data is going to reinforce the Fed’s perceived need to fight inflation,” Gayle said.

By Anjali Cordeiro, Karen Talley, Dow Jones Newswires

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