Data Soothe Rate-Hike Fears

The CPI points to a less-aggressive Fed while housing news and jobless claims are upbeat.
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Updated from 10:09 a.m. EST

Everything's coming up roses for the economy. Wednesday morning saw the release of four different statistics that were better than expected

and

reversed prior troubling reports.

At the top of the list, the Consumer Price Index for December posted a 0.1% decline and climbed just 0.2% excluding food and energy. Elsewhere, housing starts rebounded from a steep drop in November, mortgage applications jumped after three weeks of declines, and new claims for unemployment insurance tumbled to the lowest level in a month, setting up conditions for stronger gains in payrolls this month.

Despite the positive data and generally upbeat earnings news, major averages were down in the early going Wednesday. The

Dow

and

S&P 500

were recently off over 0.3% each and the

Nasdaq Composite

was down 0.7%.

Any

positive tidings from last night's post-close earnings were dampened this morning by a slew of downbeat quarterly reports, including those from

J.P. Morgan Chase

(JPM) - Get Report

,

Southwest Airlines

(LUV) - Get Report

and

Lucent

(LU)

. Further weighing on the entire tech sector, Morgan Stanley is out with its 2005 outlook and the analysis isn't pretty especially when you consider how much investment banking that firm does with those companies. Revenue for tech companies covered by the firm are forecast to rise 5.5% compared to First Call's estimate of 6.8% for the same stocks. Operating income is forecast to grow 5.8% after a near 50% jump last year.

Treasury prices, conversely, improved on the inflation reading, as the

Federal Reserve

won't see any solid signs of increasing consumer prices before its rate-setting body meets again at the beginning of February. In recent speeches and the minutes of the December meeting, central bankers have been signaling that they might pick up the pace of interest rate hikes if signs of price pressure become evident.

For a fixed-income market that has grown comfortable with the Fed's "measured" pace of one-quarter percentage point hikes, the signals caused some unease. Wednesday's tame CPI report, despite much more serious price increases seen in the Producer Price Index over the course of 2004, assuaged some of the worrywarts.

"Today's CPI report should ease concerns about immediate inflationary pressures from high energy prices and firms' ability to pass along cost increases to consumers," wrote Economy.com's Matthew Martin.

The trailing 12-month rate of CPI inflation was 3.3%, down from 3.5% in November. Core inflation is up 2.2% over the past year. The yield on the 10-year Treasury note, which falls when prices rise, was recently down to 4.19% from about 4.20% on Tuesday.

Speaking at the Council on Foreign Relations Wednesday morning, Fed governor Ben Bernanke said the CPI report shows inflation is "well under control,"

Bloomberg

reported.

A modest pickup in inflation wouldn't require that the Fed accelerate its economy-cooling rate hike campaign, according to the economics team at Wachovia Bank. "At this stage of the economic cycle it is normal for both inflation and interest rates to rise," they wrote. "The latest Fed statements reflect the observations by some of the members of the Federal Open Market Committee that inflation risks are on the upside."

Core inflation should rise from 1.8% last year to 2.3% this year, with the Fed raising the fed funds rate to 3.75% by year-end and the yield on the 10-year going to about 5.1% without the economy coming unhinged, Wachovia projects.

If You Build It

The real estate news was equally bullish, despite the super-heated market of the past two years. Homebuilders, which traded off on the November report, got a boost at the open with the Philadelphia Stock Exchange Housing Index recently up 1.1%.

Back in November, new housing starts tumbled 13.1%, the biggest one-month decline in almost 10 years, to an annualized rate of 1.8 million. In December, starts snapped back, rising almost 11%, the biggest monthly gain in over seven years, to 2 million. And the November figure was revised to a 12.5% drop. Overall, the fourth quarter was still one of the three busiest ever for builders.

Starts are 3% below the level of a year ago, however, and permits -- a further forward-looking indicator of construction activity -- declined slightly.

The Mortgage Bankers Association said loan applications rose 16% last week, after dropping by a cumulative 15% the previous three weeks. The banking group's index is supposed to be seasonally adjusted so that a typical year-end slowdown would not explain the losses. Applications for new purchases, which had experienced a steeper drop, rose 14%, while refinancing deals rose 19%.

Both increases came as rates on both fixed- and floating-rate loans declined for the week. Beneath the headlines, though, the mortgage market is still slowing. The index is 25% below its reading from a year ago as the refi index is 38% below year-ago levels. Rates are higher than a year ago, especially on floating-rate loans thanks to the Fed's five rate increases.

On the employment front, economists had been dismayed by the rising tide of weekly unemployment insurance filings last month. Some suspected seasonal factors might be at play and those doubts appeared vindicated by Wednesday's report showing filing dropped to 319,000 from 367,000 the prior week. There was one troubling sign -- claims rose in California, Texas and New York, the three biggest states by population.

In keeping with TSC's editorial policy, Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send

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