Only nine more trading days remain in the year. Markets tend to be thin as professionals have already done all they could do for their portfolios. Some tax-related buying and selling occurs at this time of year.

BONDS
As expected, the Federal Reserve raised its key rate by 25 basis points pushing the federal funds rate target up to 2.25 percent, 1.25 percentage points higher than a year ago. On the whole, the 10-year Treasury note yield is lower than it was before the Fed began to raise rates. However, the 2-year note yield has crept up in the past several weeks. Apart from three weeks ago when the 2-year note yield closed at 3.02 percent on Friday, we would have to go back to the first week of June 2002 to see the 2-year note surpass 3 percent. We should continue to see rate increases as the Fed raises rates further in 2005. The 10-year note yield has dipped because bond investors are less worried about inflation when they know that the Fed is indeed staying vigilant against it. But if the fed funds rate target is raised in 2005, we will probably see rate increases across the maturity spectrum, not just at the short end of the curve.

Markets at a Glance

Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences.

The Economy

November CPI in line with expectations
The consumer price index increased 0.2 percent in November, significantly less than October's 0.6 percent hike. The two major volatile components, energy and food, both posted gains of 0.2 percent for the month. The core CPI, which excludes food and energy prices, also increased 0.2 percent in November. Despite the moderate gain for the month, however, the year-over-year gains are continuing to accelerate. The total CPI now stands 3.5 percent higher than a year ago; the core CPI is 2.2 percent higher than last November. By historical standards, the gains are not particularly large, but the trend is certainly in the wrong direction. Notice that the core CPI has doubled its rate of increase since the beginning of this year.

The chained CPI, which is akin to the PCE deflator with a shifting composition of goods and services purchased in any given month, is 3.1 percent higher than last November. The core is up 1.9 percent. The chained CPI is lower than the "official" CPI because it reflects the fact that consumers change their purchases based on the changing prices of goods and services. Consumers, obviously, prefer lower priced items to higher priced items. (Even status seekers like to get bargains on their Prada purses and Jimmy Choos).

Administration officials are discussing the use of the chained CPI in lieu of the current (fixed basket) CPI for annual cost of living adjustments in social security increases. This would save a lot of money in the long run because the chained CPI tends to run lower than the "official" CPI. Incidentally, don't blame just the administration on this one - Fed Chairman Greenspan made the suggestion to Congress about a year ago.

FYI - Social security recipients tend to be older than the rest of the population and tend to have a greater need for medical care. Oddly enough, medical care costs in the official CPI are up 4.4 percent from last November; medical care costs from the chained CPI are 4.3 percent higher than last year. The difference in this component is not significant. In both cases, the CPI for medical care is much higher than the total CPI. This means that a change in the CPI escalator would disproportionately hurt the elderly on social security incomes.

Retail sales chugging along
Retail sales inched up 0.1 percent in November after an upward revised gain of 0.8 percent in October. Motor vehicle sales fell 1.3 percent in November after dipping 0.5 percent in the previous month. Excluding this volatile sector, retail spending increased a moderately healthy 0.5 percent in November after an upward revised gain of 1.1 percent in October. The October gain was boosted by a 5.3 percent spurt in gasoline sales (due to higher energy prices). Excluding auto and gasoline station sales, spending rose more moderately - but solidly - in both October and November.

Retail sales improved in the three-month period spanning September to November relative to the three-month period spanning June to August. Retailers are always hoping for a burst of spending in December, but from a practical standpoint, if retail spending is in line with the past three months, it would still show an improvement from the middle months of this year.

Housing starts slip
Housing starts plunged in November, falling 13.1 percent to a 1.77 million-unit rate. However, the Census Bureau believes that it takes five months to establish a trend in housing starts. And the 5-month moving average revealed that housing starts slipped only marginally in November. Perhaps the November decline in starts was overstated, but economists have long been waiting to see some moderation in the housing market. Mortgage rates have remained low, but employment and income growth need to accelerate before we will see new potential homeowners in the market.

We have likely seen the peak in housing starts. The downward trend in housing will bring with it a slower rate of spending for new furniture and appliances and other household furnishings. A rising rate environment is not friendly for housing activity. Housing affordability would certainly improve with accelerated income gains, but incomes won't rise faster unless employment growth kicks in.

Industrial production slows in November but December outlook promising
The index of industrial production increased 0.3 percent and now stands 4.2 percent higher than a year ago. The latest month's rise was only half as strong as in October. A drop in motor vehicle assemblies hampered growth, as did a moderation in production of construction supplies. The November moderation may be short-lived however.

The general business conditions index from two key Fed surveys (Philadelphia Fed and Empire State) both increased in December after moderating in November. The Philly Fed index rose to 29.6 in December from a level of 20.7 in November, and the Empire State index increased to 29.9 from a level of 18.9 in the previous month. While these Fed surveys don't necessarily move in tandem with the index of industrial production, they do tend to point in the same general direction.

International trade deficit widens again
The international trade deficit on goods and services widened to $55.5 billion in October after narrowing moderately in September to $50.9 billion. The trade deficit has surpassed the $50 billion mark for five straight months now despite rising exports. The problem is that imports are growing more rapidly than exports despite the weaker exchange value of the dollar because the U.S. is growing more rapidly than many of our trading partners.

Notwithstanding the European and British tourists currently visiting New York City for bargains, export growth remains sluggish relative to import growth. (When foreigners visiting the U.S. buy our purchase, it counts as exports. Similarly, when we buy trinkets on our overseas travel, they count as imports.) Our oil bill alone is humongous. In October, half of the acceleration in the trade deficit was due to petroleum. A reduction in consumer spending could help alleviate the import demand. However, there are so many goods that we don't even produce here anymore that consumers don't have a choice between foreign or domestic.

The Bottom Line
In a busy week, the Fed spoke while a bulk of market-moving indicators were reported. The final two weeks of this year are likely to be quiet. Financial market players will keep their fingers on the pulse of the shopping mall. Holiday sales will be the primary focus of attention.

Looking Ahead: Week of Dec 20 to 23

Monday
The index of leading indicators fell 0.3 percent in October, the fifth straight month in which this indicator has posted a drop. While this does not mean that the economy is headed towards recession, it does mean that economic activity has moderated lately, particularly in the manufacturing sector. In November, the factory workweek and vendor deliveries decreased again; stock prices and consumer expectations rose for the month.

Leading indicators index Consensus Forecast for Nov 04: 0.1 percent
Range: 0.0 to 0.3 percent

Wednesday
Real GDP grew at a 3.9 percent rate in the third quarter and the GDP deflator increased at a 1.3 percent rate during the period. The Commerce Department is scheduled to release its final revision today; it is not likely to be very different from the previous month.

Real GDP Consensus Forecast for Q3 04: 3.9 percent annual rate
Range: 3.8 to 4 percent annual rate

GDP deflator Consensus Forecast for Q3 04: 1.3 percent annual rate
Range:1.2 to 1.3 percent annual rate

Thursday
New jobless claims plunged 43,000 in the week ended December 11 to 317,000 after increasing in the two previous weeks. Jobless claims are notoriously volatile at this time of year. The 4-week average dipped to 337,750.

Jobless Claims Consensus Forecast for 12/18/04: 335,000 (18,000)
Range: 320,000 to 345,000

Durable goods orders fell 1.1 percent in October, just about reversing the previous month's gain. New orders have zigzagged in the past few months, and the overall trend is positive but much more moderate than a year ago.

Durable goods orders Consensus Forecast for Nov 04: 0.7 percent
Range: -1.0 to 1.5 percent

Personal income rose 0.6 percent in October, stronger than the previous four months. However, the moderation in November nonfarm payrolls could limit the growth in income for the month. Personal consumption expenditures grew 0.3 percent in October. November retail sales were a bit stronger and point to a positive trend for the month.

Personal income Consensus Forecast for Nov 04: 0.2 percent
Range: 0.0 to 0.5 percent

Personal consumption expenditures Consensus Forecast for Nov 04: 0.2 percent
Range: 0.1 to 0.4 percent

The University of Michigan's consumer sentiment index had increased in the first part of December. However, in November, the final figures turned out to be weaker than the mid-month reading. It will be interesting to see whether consumer attitudes remained improved.

Consumer sentiment index Consensus Forecast for Dec 04: 95.7
Range: 93 to 96

New home sales were roughly unchanged in October running at a 1,226,000-unit rate. Housing starts plunged in November - with single-family housing starts falling 11.7 percent. Often, but not always, the trend in housing starts is matched in new single-family home sales.

New home sales Consensus Forecast for Nov 04: 1,200,000
Range: 1,190,000 to 1,240,000

Looking Ahead: Week of Dec 27 to 31

Tuesday
The Conference Board's consumer confidence index fell back to 90.5 in November, the fourth straight drop since July. Perhaps consumer attitudes improved in December'

Consumer confidence index Consensus Forecast for Dec 04: 93
Range: 90.5 to 97

Wednesday
Existing home sales were roughly unchanged in October running at a 6.75 million-unit rate. Housing starts plunged in November - with single-family housing starts falling 11.7 percent. Historically, existing family home sales moved in the same direction as single-family housing starts.

Existing home sales Consensus Forecast for Nov 04: 6.75 million-unit rate
Range: 6.65 to 7.02 million-unit rate

Thursday
New jobless claims are notoriously volatile at this time of year. Make sure to follow the 4-week moving average.

Jobless Claims Consensus Forecast for 12/25/04: 320,000
Range: 310,000 to 330,000

The NAPM-Chicago decreased to 65.2 in November after rising to 68.5 in October. Levels are high in any case. Market players view this index as a leading indicator for the ISM manufacturing survey. Keep in mind, however, that it covers non-manufacturing activity as well as manufacturing activity.