Inflation Drives GDP

By: Ed Bugos | Thu, May 3, 2001
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On the surface, real U.S. Gross Domestic Product grew by 0.5%, or at an annualized rate of 2% for the first quarter (2001). That was only the first surprise, but it was enough to give dollar bulls the impetus to hammer back Forex markets on Friday, as it was first announced.

Yet despite broad dollar momentum, the GDP data upset a premature recovery effort in the Treasury bond, and forced a retest of the prior week's lows before pulling itself up again by Tuesday, of this week, in order to threaten a two week double bottom - with neckline resistance at 102 on the June contract.

NAPM US Treasury

On Tuesday, bond traders were fed fresh news from the manufacturing front: the National Association of Purchasing Managers informed us that their index couldn't muster enough valor to, well, exceed market expectations. Further troubling for the bond bears (though even more so for the Treasury) were reports, which have begun to reveal that auto sales fell so significantly in April that discounts couldn't even lure customers into the car lot. As regards the Treasury, I wonder how many people had already spent their "tax refund" in the first quarter, considering that autos were the single one largest factor affecting the consumption component of this GDP series?

Not even giving that a second thought, however, the still optimistic crowd on Wall Street grabbed the moment and bid up stock prices in anticipation of yet another ½ point rate cut (Bloomberg headline). Undoubtedly, the boys club (which includes ladies these days) at the Federal Reserve Board approved of the equity market's belated reaction to their repeated stimuli, even if stock prices weren't the official target of their deliberations. Nonetheless, it does not tend to work out well for them when markets price in additional rate cuts, before they arrive.

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Ed Bugos

Author: Ed Bugos

Edmond J. Bugos
GoldenBar.com

Ed Bugos is a former stockbroker, founder of GoldenBar.com, one of the original contributing editors to SafeHaven.com and former editor of the Gold & Options Trader. He continues to publish commentary on market and economic trends; and provides gold, economic and mining research to private clients worldwide.

The editor is not a registered advisory and does not give investment advice. Our comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While we believe our statements to be true, they always depend on the reliability of our own credible sources. We recommend that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

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