Inflation and Interest Rate Chatter Must Be Monitored Closely

Tuesday morning brings two headlines which will dampen the enthusiasm for stocks and commodities in the short-term. According to Bloomberg:

“So long as inflation expectations remain stable and well anchored” and the rise in commodity prices slows, as he’s forecasting, then “the increase in inflation will be transitory,” Bernanke said yesterday in response to audience questions after a speech in Stone Mountain, Georgia.

“We have to monitor inflation and inflation expectations extremely closely because if my assumptions prove not to be correct, then we would certainly have to respond to that and ensure that we maintain price stability,” he said.

Bloomberg also has a story on China’s ongoing efforts to tame inflation:

China raised interest rates for the fourth time since the end of the global financial crisis to restrain inflation and limit the risk of asset bubbles in the fastest-growing major economy.

The benchmark one-year lending rate will increase to 6.31 percent from 6.06 percent, effective tomorrow, the People’s Bank of China said on its website at the end of a national holiday. The one-year deposit rate rises to 3.25 percent from 3 percent.

Due to the threat of rising interest rates and weakening technicals, we recently cut back on our exposure to bonds in the vast majority of client accounts. At some point during the current advance, we may lighten up on some of our weaker positions, which does two things:

  • Frees up cash for more attractive opportunities.
  • Reduces risk in the event the market weakens more rapidly than anticipated.

We will continue to keep an open mind about both bullish and bearish outcomes over the coming weeks and months.