Goldilocks Gets Eaten

Back on September 22, we asked: Whither Goldilocks? 

Yesterday, the WSJ’s Marketbeat looked at a similar question, and concluded Goldilocks Gets Eaten:

"Just eight days ago, the 10-year
Treasury note’s yield closed at 4.83%, and investors were thinking that
the economic slowing would be brief, that the Federal Reserve would
remain on hold, and that the much-heralded Goldilocks scenario might
come to fruition, as inflation wouldn’t get out of control.


How things change. Since that day, a barrage of data has upended those expectations. Two reports on home sales suggested conditions in real estate are continuing to worsen. Another report suggested construction spending will decline next year for the first time since 1991. We saw a worse-than-expected GDP report that may end up revised downward, and today’s lackluster reports
on Chicago-area manufacturing conditions and consumer confidence have
market participants now thinking harder about a sharper slowing over
the next couple of quarters.

Consumer confidence fell surprisingly in October, the
Conference Board reported, and some economists pointed out that falling
gasoline prices and strong stock-market gains should have had a
more-positive impact. But David Ader, fixed-income strategist at RBS
Greenwich Capital, says the housing woes are an overriding factor in
consumer attitudes. "There’s a psychological element to the wealth
effect…most Americans have the bulk of their wealth and liquidity tied
up in their homes," he says.

The yield on the 10-year Treasury was lately at 4.63%,
the lowest since the beginning of October, and the federal-funds
futures on the Chicago Board of Trade now put 84% odds on a rate cut by
May, compared with 11% just after the Fed’s Oct. 25 meeting. "It’s
prodded [the market] further into saying a slowdown of some magnitude
is coming," says Mr. Ader. "People are thinking about a harder landing
than they thought about two weeks ago."

Good stuff . . .


Goldilocks Gets Eaten
David A. Gaffen
WSJ MarketBeat Tuesday, October 31, 2006  11:40 am

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