What to Watch: Macro Movers

But we cannot discuss rates without touching upon the yield curve. Initially, we are concerned with the flattening of the curve. Theoretically, that implies less monetary stimulus.

But the major concern is a yield-curve inversion -- when long-term rates are lower than short-term rates. That implies a lack of appetite for capital, investment and expansion. Historically, the major concern about an inversion is recession. An inverted yield curve has a nearly perfect record of predicting economic contractions.

Surprisingly, the impact on the stock market is less certain. Brian Reynolds of MS Howells did a study on market performance post-inversion. The results were surprisingly random. Following the seven true yield-curve inversions since 1978, markets had gone up, down and sideways. It's hardly been predictive of market action.

As the Fed's monetary accommodation gets slowly removed, investors should observe the impact on several areas: the yield curve, consumer spending, housing, global trade, and foreign purchases of U.S. Treasuries.

Housing

Quick, name the most robust, significant sector of the U.S. economy. If you said housing, congratulations, you have been paying attention.

Northern Trust's economic team has calculated that nearly half of all post-recession, private-sector job creation has been housing-related. That's an astonishing figure; imagine how morose the economy would be if not for the housing boom.

Let's not debate the real estate bubble (been there done that). Instead, let's look at what might happen with housing over the second half.

There's little reason to expect a dramatic change in housing sales without a significant rise in mortgage rates. If the so-called conundrum persists, as some think it might, then housing will remain robust.

John Herrmann, chief economist at Cantor Fitzgerald, is one who expects rates to remain low and housing to stay vigorous. He is forecasting a record-setting pace of homes sold in 2005, and expects that in 2006, sales will surpass this year.