This morning's GDP announcement didn't get a good reception on the Street. Of course, the stock market Deflated some on the back of that, with Dow down about 128 points. The NASDAQ Comp decided to close at a new low for this move down near 1900.
The GDP did have a bit of a surprise in it after all: The deflator, the estimate for inflation's contribution to GDP, was 3.2% compared to an estimated 2.1%. What that says is the inflation rate is running at 3.2%. How does that make the Fed feel? They have to meet next week to decide the new interest rate. The economy isn't growing as fast they had hoped, 3.1% versus an expected 3.5% and the deflator is sitting at 3.2% and don't forget that the funds are at 2.75%. This is what we have been talking about--the economy is slowing so the Fed would like to ease but the inflation rate is still above the funds rate. What would you do? We still think they will raise rates 25 bps next week but we are getting less convinced about the next time they get a chance to move them. They probably will sacrifice a little inflation if the market or the economy are not performing to their liking.
That reminds us of the gold market and how it could very easily perform great in the environment where inflation is rising and the economy is not and the Fed can't raise rates. We are keeping an eye on the complex and today the spread on the Gold price to HUI moved higher again, to 255. Gold stocks are just getting hammered while the metal stays afloat. We would be more anxious to buy the stocks if we could see the price of gold come down and the commitment of traders improve. So far, that's not happening.