Looking For Three Quarters – And I Don't Mean Football

Barring an unlikely CPI aberration, the Fed got all the cause it needs to cut rates three quarters of a point at its next meeting on January 30th, or in a combination before. A declining PPI, after a high reading last month, is a sight for sore eyes as the Fed has been looking wearily at a slowing economy with rising inflation. Futures point towards a fifty-fifty chance between a 50 basis point and 75 basis point cut. With inflation looking tame, and given some of the FOMC members comments this past week, it's likely that (some) relief is on its way.

As the Fed continues a steep decline in interest rates to "catch up with the curve", you can expect that a limping consumer will gain life in the second half of 2008. With interest rates down around 2.5% to 3%, consumers will feel some relief in the form of borrowing and refinancing costs this summer. This should start to bring out buyers in the housing market – the 30 year fixed mortgage rate is already at an attractive 5.5% - and some building stocks may start to perk up. Anything consumer related has been absolutely murdered over the past two months, bringing some housing multiples below 6x and other retail multiples into the single digits. With rates heading down quickly, consumers will likely stage a resurgence later in the year.