Thursday, April 28, 2005

GDP Deflator

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.


Anonymous said...

It appears we are approaching the rock and the hard place. Should be an interesting couple of weeks. PAAS closed at 13.72 today (dwn $.17 or >1%). How much more downside does this stock have? I was considering taking a small position in it but I see the metal stocks continuing to get pummeled. If not now, when? Or better yet, what will a novice investor like myself see to signal a buy?

Thanks and have a good weeekend.


Glenn said...

The precious metals sector has been difficult to measure due to the heavy pressure on the mining stocks with virtually no downside on the metals themselves. Normally this leads to a pullback in the metals as stocks usually move in front of the metals. So, one thing to look for is a solid drop in the metals without a corresponding drop in the stocks. Of course, there will always be my constant watching "the pot boil" that will be reported here in the blog. Good to have your comment, first one!!!