Wake Up Call - Jan 31

Good Morning. At 9:40 a.m. EST, U.S. markets are broadly lower following weakness in Asia and on the strength of the GDP report. We believe economic health allows the Fed to target inflation more aggresively, and we expect equity investors to carefully watch Fed tone in their statement this afternoon. We anticipate that tone to be hawkish, and to reflect concern for food and energy price inflation.

Asia:
Hang Seng Index -2.06%; Shanghai/Shenzhen 300 -6.53%; NIKKEI 225 -0.61%; BSE SENSEX 30 -0.85; KRX 100 -0.74%; Ho Chi Minh +1.85%

U.K. & Europe:
DJ STOXX 50 Index -0.42%; FTSE 100 -0.25%; CAC 40 -0.48%; DAX -0.1%; Russian RTS Index +1.02%

KEY HEADLINE NEWS

• Fourth quarter GDP grew 3.5%, exceeding economists' consensus view for 3.0% growth, as measured by Bloomberg. GDP was fueled by strong consumer spending, while home construction fell at a pace of 19.2%. Remember, it was just early January, when economists had widely anticipated 2.0% growth, and the Fed also anticipated less growth than experienced. We reiterate our view that this and recent data showing economic health will intensify the Fed's focus on inflation. We believe the Fed will provide hawkish commentary in this afternoon's statement, while keeping rates unchanged. Prices, excluding food and energy, rose 2.1%, still above the Fed's target range of 1-2%. We expect significant pressure from both food and energy prices in 2007-2008, and anticipate the Fed will act to hike rates before cutting them. All this boils down to a negative impact to equities, if the tone and actions of the Fed reflect our view. Soon enough, we believe it will have to.
• A preliminary report from ADP Employer Services indicated private employers likely added 152,000 jobs in January, versus consensus expectations for 130,000.
• Boeing reported earnings, beating estimates and raising guidance.
• Chinese shares tumbled on increasing awareness of their strong gains and hefty relative valuation.
• See "The Greek's Week Ahead" for the day's and week's economic playbook.

We urge you to read our section within the sidebar, entitled "Headline News", for further important information for traders and investors.

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Check back in later this morning, as "Today's Morning Coffee" will outline in greater detail the day's activity in overseas and commodity markets, and provide economic data & analysis and stock specific news. (disclosure)