Fed Takes Bow, Tech Stocks Take Another Hit

The fed funds futures market now prices in only one rate cut in the second half of 2007, down from expectations in early December for two rate cuts by the May 2007 meeting.

"The hard-landing scenario appears all but dead," says T.J. Marta, chief fixed-income strategist at RBC Capital Markets.

Signs of stability in housing keep appearing. Housing starts jumped 4.5% in the month of December following November's 6.4% increase, while permits jumped 5.5% after 10 consecutive declines. The Philadelphia Fed's manufacturing index for January rebounded to an 8.3 reading, much higher than the 2.0 reading most economists expected. Also, initial jobless claims fell another 8,000 to 290,000 for the week ended Jan. 13, the lowest level since February 2006.

The housing data are heaped atop strong exports and retail sales at the end of last year to put fourth-quarter GDP growth at or above 3% by most economists' estimates. Levy predicts fourth-quarter growth to come out between 3.25% and 3.5%, but says the economy will slow to 2% to 2.5% GDP growth in coming quarters.

"We'll be in the low twos, but still healthy," he says. "The adjustment processes are working efficiently, but there are still adjustments." He notes that the impact of the falling trade deficit, or rising exports, is likely to happen only once. The U.S. may sustain the higher rate of exports, but another jump is unlikely. He also says the rush of consumer spending of the fourth quarter is unlikely to be repeated.