Saturday, June 05, 2004

Stagnation + inflation = stagflation.
Stocks rose Friday after the release of a long-awaited jobs report that showed an economy that still isn't growing fast enough to require drastic tightening by Alan Greenspan's Federal Reserve.

. . . In the credit market, interest rates surged to a 2-year high on Friday. The Commodity Research Bureau index recently hit 23-year highs. Oil hit all-time highs repeatedly in recent weeks and is still almost 50 percent above the start of the year. And the government Thursday reported a 4.6 percent rise in hourly compensation -- one of the strongest signs yet that labor costs are rising. . . .

The economy's sluggish pockets will probably keep the Fed from getting overly aggressive when it meets at the end of the month. Most analysts are looking for the central bank to launch a series of one-quarter point rate increases in a gradual tightening.

But rate hikes are probably not the biggest immediate threat to the stock market rally. Instead, it's the withering impact of thousands of small cost hikes that will become Wall Street's villain. Corporate profits will be increasingly squeezed by rising costs, which will also lead to sagging demand from sticker-shocked consumers, analysts say.

"People are updating their models and the consensus will start to reflect a slowdown," said Kalinowski. "You're going to see the massive number of positive earnings pre-announcements subside. Things will start to turn negative."

. . . The bad news could start to arrive as early as August, when companies start giving bearish forecasts for their third-quarter results

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