It's not wise to get too comfortable with the relatively mellow volatility of recent years in the economy and markets.
So far, the Fed's been playing with an open hand and giving strong tells to the market.
But if inflation hits, it may need to play closer to the vest so that not everyone's wise to its tactics and able to speculate off its moves.
The United Nations Security Council last week finally managed to craft a peacekeeping proposal that has produced a cessation -- and with any hope, a lasting one -- to the hostilities in southern Lebanon. Also last week, the core producer price index (PPI) report came in with an unexpected, but very welcome, shortfall from the consensus guess for July. In addition, hawkish Sen. Joseph Lieberman (D., Conn.) lost a primary election that had been portrayed as a straw poll on the Bush administration and an insight into this November's results for congressional incumbents.
As a result of these developments -- or for some other reason -- stocks managed to break a losing trend and bonds were able to extend a two-month winning streak.
That downtick last week in the core PPI was a nice surprise, one that set up the very slight subsequent deceleration in the consumer price index (CPI) for a better reception than it might otherwise have received. These reports were the initial ones to follow the Federal Reserve's stand-pat decision two weeks ago, a choice that sets that body up for second-guessing should inflation momentum prove unresponsive to a modestly slowing economy. The July evidence that inflation is not a monotonically rising process, despite the fears of some, has caused the odds to fall to near zero for a resumption of Fed tightening at the September Federal Open Market Committee meeting.
Of course, if the Fed was to tighten at the next meeting, whatever the numbers, that would make it 17 hikes, one pass, and then another hike. I'd be tempted to conclude on the basis of such a sequence that the committee was overly full of itself regarding the precision of its foresight and control of events, or that it was simply nervous and twitchy. A second stand pat was a high likelihood even before the July inflation numbers.
Asset Managers Bonds Gain Fund Managers' Favor 8/15/2006 3:26 PM EDT Economic pessimism, earnings concerns and the Fed's rate pause are leading to new views.
Market Features What a Week: Buoyancy 8/18/2006 5:30 PM EDT A dose of good news puts a spring in the bulls' step -- and the summer selloff in the rearview mirror.
Market Commentary Markets Not Priced for Terror Threat 8/10/2006 2:30 PM EDT The latest threat could accelerate weakness in stocks that have faltering fundamentals and technicals.
Market Commentary European Rates: No Worries, Mates 8/8/2006 9:58 AM EDT Contrary to conventional wisdom, European rate hikes may create an opportunity for U.S. investors.
Market Commentary Encouraging Echoes of Cycles Past 8/14/2006 1:36 PM EDT The market's gloom is worse than its performance so far, and the outlook is brighter than most see.
Bonds Bond Vigilantes Missing in Action 8/19/2006 4:10 PM EDT The fixed-income market ignores signs of resilient growth and rising inflation at its peril.
Jim Griffin is economic consultant and portfolio adviser to ING Investment Management and its Hartford-based unit, ING Aeltus, which manages institutional investment accounts and acts as adviser to the ING Mutual Funds. His commentary on the financial markets is based upon information thought to be reliable and is not meant as investment advice. While Griffin cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.
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