Final Hour Mars Data-Driven Rally
Some noted that Hurricane Katrina's hit to the Gulf Coast likely helped boost productivity, as output was little changed while there were large drops in regional employment.
In addition, while wage inflation didn't appear to be a major concern in the third quarter, the productivity report says nothing of "the potential for wage inflation going forward," notes Lehman Brothers economist Drew Matus. "As a result, the Fed will still be on watch for any wage-push inflation in the coming months."
The main cause behind the rise in long bond yields last week was that the economy is still powering ahead, as seen not only in the 4.3% growth in the third-quarter GDP, but also in the November employment report.
And Goldman Sachs economist Jay Hatzsius notes that although the overall third-quarter productivity report showed improvement, business sector productivity actually was revised downward.As for labor costs, "we prefer to focus on the year-to-year measures, which still show a strong nonfarm productivity trend [up 3.1% year-over-year] but a more significant rise in unit labor costs over the past couple of years, to 1.8% year on year despite the soft third-quarter data," Hatzsius wrote. Certainly, that the Fed may be near the end of the road wasn't the message from San Francisco Fed President Janet Yellen last week, nor of Fed Governor Marc Olson on Monday. The Fed, Olson said, isn't concerned about lifting interest rates too high and hurting the economy. Yet concerns that the Fed will do its best to slow the economy next year are haunting current bulls such as Harris Trust's Ablin. He believes the S&P still has room to rise 4.5% from current levels. But because the Fed will "dampen retail sales growth and housing activity," he says this market "is not a table-pounding buy."
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