Wall Street enjoyed a nice four day winning streak before renewed stagflation fears sent investors scurrying.  Economic reports that were released showed that growth had stalled along with increasing signs that unemployment may be on the rise.

All eyes have to turned this week to Fed Chairman Ben S. Bernanke as he speaks to congressional hearings on the state of the economy.  He said while he doesn’t expect a return 70’s style “stagflation”, he does concede that with the continuing housing slump, some smaller banks could begin to fail.  Some analysts expect conditions in the credit markets to worsen further in the short term as lending institutions continue to write down losses.

With the dollar hitting record lows the price of energy and commodities continued to rise with oil and gold trading at record highs.  Overall consumer spending rose in the month of January but much of that can be attributable to the higher prices.  On a positive note, the weak dollar has spurred a growth in U.S. exports with the nation’s trade deficit shrinking for the first time since 2001.

Even with the specter of rising inflation and a falling dollar, many believe that the Fed will cut rates once again after it’s next scheduled meeting on March 18.  Financial markets have already priced in a half percentage point cut in futures trading.

Unless other central banks follow suit and lower their rates you can expect more downward pressure on the dollar and a rise in prices for dollar denominated commodities.

CNBC reported earlier today that a bailout plan to rescue trouble bond insurer Ambac would be announced sometime early next week.  The news sparked a late rally on Wall Street even as investors cope with increasing signs of an economic slowdown.

Yesterday’s news that manufacturing activity was slowing as well as a bleak forecast on future economic growth had stocks trading down sharply until the CNBC report surfaced late in the afternoon.

There is a lot at stake for the financial sector in keeping Ambac and it’s rivals at their AAA rating level.  With the industry insuring over $2.4 Trillion in bonds that are in danger of being devalued, the ramifications of a ratings downgrade are incalculable. 

Already new bond issuance has slowed to a trickle and bonds that are being sold are doing so at sharply increased costs.  Municipalities are having an especially rough time of it, with many of them delaying their scheduled public works projects.

The biggest fear for investors is that a bond devaluation would lead to a new wave of write downs for an already beleaguered banking system.  Some analysts are estimating that bank write downs could go as high as $100 Billion.  It would pretty much signal a deathblow to any chance of our economy staying out of a recession.

Even with this bit of good news most analysts are remaining cautious.  The bond insurance industry still has a lot of exposure to sub prime debt that isn’t going to go away overnight.

Many different factors are beginning to take their toll on the American consumer as they try to cope with the current woes of the economy.  Consumer confidence continues to fall as more and more people grow worried about a recession.

Many retailers are having to downgrade their earnings forecasts for this quarter as consumer spending shows increasing signs of weakening.  High end retailers are faring the worst, as consumers are becoming much more cost conscious at the checkout counter.

The prolonged housing slump is expected to continue for the foreseeable future.  The sharp decline in housing prices has taken a big chunk out of the wealth of what for many is their single biggest asset.  Many who have purchased homes in the last two years now have mortgages that are worth more than the values of those homes.

The subsequent collapse of the sub prime market and the accompanying credit crunch has also had a large effect on consumer spending.  With the troubles of the banking system, individuals and businesses are finding it harder and harder to borrow money.  Credit card issuers are also seeing an increase in late payments and a slowing in spending.

Higher living expenses are also to blame.  The sharp rise in energy and food prices are taking a larger percentage out of disposable income for many middle and lower class Americans.  The weak dollar has also meant a sharp rise in the cost of imports.  While all this is taking place, there has been little to no wage inflation reported as of yet.

The biggest factor to the slowing of spending may be the economy itself.  As economic growth continues to slow, more and more Americans are becoming worried about the future of their jobs.  January saw the economy lose jobs for the first time in years and many are fearful that trend may continue.