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This month, we will be watching energy prices to see if the Feds recent decision to leave interest rates unchanged continues. The CPI data has shown a slight decline in inflation over the past 3 months, but that was mainly due to the pullback in energy prices.
If energy prices do resume their march higher, the CPI will begin to reflect a higher inflation number than the street is currently expecting. This could throw a serious monkey wrench into the consensus opinion that the Fed will begin lowering interest rates by March.
Now that OPEC has announced it is cutting an additional 500,000 barrels per day to their previous cut of 1.2 million barrels, we think energy prices could go higher as we head into the summer driving season.
Oddly, we have noticed that the S&P 500 and oil prices have moved up in tandem. During the early summer, as oil prices moved higher, the S&P moved lower. The stock market is shrugging off something they thought was a serious threat earlier in the year. Odd isn't it?
November retail sales showed an increase of just one percent. Its becoming clear that the deflating of the real estate bubble is causing some problems for consumers who have been using home equity extractions to fuel their spending habits.
Another sign that the real estate bubble is much worse than we are led to believe is the recent debacle taking place in the area of subprime mortgage lending. Subprime lenders could care less about a borrower’s ability to pay, as long as they have enough home equity to secure the new loan. In recent years subprime loans have become a significant part of the home equity market.
We will be watching all of these developments very closely in the weeks ahead.
