Every time a different indicator turns out stronger than expected, bond investors get more and more worried
that the Fed will be forced to raise rates rapidly and quickly. As a result, bond prices have tumbled in the past
couple of weeks - and yields have surged. At the same time, the economic data is more bullish for equity
investors who simply want to see better profit margins.
The data certainly suggests that the recovery is underway - as the Fed chairman noted last week. However, the
fact that the economy is starting to grow again doesn't mean that the recovery will be robust. In fact, retail sales
are posting modest gains - and industrial production has a long way to go before it recovers all that it has lost in
the past eighteen months.
Fed officials are likely to shift policy away from their current stance that emphasizes the risks to the economy.
Market players are already anticipating a 25 basis point rate hike within the next couple of months. Keep in
mind, though, that inflation is subdued, so interest rate hikes don't need to be large or rapid in the next couple of
months. Furthermore, the consumer sector is showing signs of recovery, but capital spending is still pretty
anemic. Corporate profits aren't hot shakes right now either.
Fed officials may choose to be pre-emptive in the next several months but they won't want to stop the recovery
dead in its tracks either. Greenspan has already stated that the recovery is likely to be mild lacking the pent up
demand for motor vehicles and housing normally associated with strong recoveries.
Markets at a Glance Recap of US Markets The Economy The Bottom Line Looking Ahead
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