Markets on June 29, 2005

Morning - 9:20 am

Looks like we would have a second day of +100 points gain for DOW. Oracle beat espectations and raised guidance. Revised GDP numbers for 1Q:05 put growth at 3.8% vs consensus at 3.7% (and earlier reported 3.5%), indicating economy was on solid footing then. More importantly, GDP deflator came in at 2.9%, vs consensus 3.2% (and earlier reported 3.2%). If the oil report out at 10:30 is bearish for oil (i.e. it reports higher inventories of crude and distillates than consensus), then that would be really bullish for equities.

One should remember that the GDP data is retrospective data, i.e. data of the Jan-March quarter. Now we are nearing end of second quarter. So it is a lagging indicator, not a leading indicator. Still, the GDP report indicates inflation was low in 1Q, even though oil prices were in their 50s. If inflation remains low currently, with oil hovering close to $60, the Fed can definitely start loosening interest rates if growth slows. But if growth was and is robust, then Fed might continue to increase rates, just to contain any incipient inflation.

Why are inflation indicators so low when house prices have been jumping up all over. Does this inflation metric exclude housing?
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Evening - 4:20 pm

Guess I was wrong in the morning. Even though oil inventory report was bearish for oil, market has drifted down slightly. Primary reason: Investors are awaiting for the FOMC meeting tomorrow, and what comes out of it on interest rates. FOMC is Fed Open Markets Committee chaired by Alan Greenspan which decides on Fed funds rate.