The pundits are all atwitter with speculation over whether the Federal Reserve will cut interest rates by 25 or 50 basis points. At least this pundit leans in the 25 point direction. Here are my reasons:

#1: A 50 basis point cut might backfire because it would signal that recession fears are far more serious than the Fed has had us believe.

#2: One of the biggest dangers of cutting interest rates is further downward pressure on the dollar. Lower interest rates lead to increased capital outflows, weakening the dollar. While a weak dollar might help exports and our trade deficit, it would also be inflationary.

#3: While recent data is indeed suggests growing softness in the economy, the recession signaled is not yet clear or strong enough to warrant a big rate cut. The danger of any such cut if the economy isn't as soft as people believe is more inflation.

#4: There is really no hurry in cutting rates. If another cut is warranted, it can be done in the next month, and another cut after that, and so on. Ben Bernanke is above all a gradualist

Ultimately, for me the real question is not whether our economy is going into a recession in 2008. In this day and age, we don't need negative growth for a bear market. All it would take would be for GDP growth to model along in the 1% to 2% range for the stock market that trend downward.

And by the way, I have absolutely no idea why the stock market rally last week. I was certainly not encouraged by that, particularly because volume in the main was rather low. This week's action after the Fed meeting will be much more telling.

This Week's Market Movers

Besides the Fed decision on Tuesday, the most important reports of the week will be that of the CPI and the PPI. The consensus forecast indicate estimates that should not raise inflation hackles. Clearly then, the big move will come if either or both of the indicators come out hot.

And remember, at least in this column, the concern is really not with core inflation. That's really an outdated concept because it excludes both food and energy. In today's modern world, food and energy are no longer "volatile" in the sense that they always go up and then to act down. Both food and energy are likely to suffer sustained price shocks over time for a variety of reasons, e.g., increased demand from India and China, the food for fuel trade-off, and so on.

Trade of the Week - Long ISIS

ISIS is a biotech company that was featured in my book The Well-timed Strategy. It�s technicals are hot and it is about to break its 52-week. Pipeline is nice and collaborations are nice.

The International Scene - Technical Take

The week offered some improvement, specifically in the US, Korea, and emerging markets. That gold is long suggest that the markets are definitely factoring in inflation and a further weakening of the dollar.

*Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

The Market Edge Market Summary from www.marketedge.com

© 2007 Peter Navarro

“Any trader or investor who ignores the power of macroeconomics over the world’s financial markets will, sooner or later, lose more than they should and if they are trading on margin, perhaps more than they have.”-- If It’s Raining in Brazil, Buy Starbucks

Peter Navarro is a business professor at the University of California and the author of the best-selling investment book If It's Raining in Brazil, Buy Starbucks and The Well-Timed Strategy. His latest book is The Coming China Wars: Where They Will Be Fought, How They Can Be Won.

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