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Friday, December 01, 2006

To Ease or Not to Ease, Not an Easy Question

US Manufacturing contracted according to the Institute for Supply Management's index of National Factory Activity.  This came as a gut check surprise to the stock market today.  The markets were not expecting a contraction in the index which has not contracted in November for the last three and a half years.

The bond markets loved the idea as the contraction reduced the index below the 50 mark.  In the past any time this index has dropped below 50 it has signaled an interest rate reduction by the Fed within about 3 months.  Many think that this reduction couple with weakness in the housing market will surely push the fed to lower interest rates.

However it might not be that easy as many contrarians believe that the factory reduction stemmed from the automobile industry and that industries outside of housing and automobiles are not contracting.