The market story of 2011 I believe will be interest rates. In Asia, central bankers will raise them in order to normalize the level relative to growing inflation. In Europe, sovereign stress will keep them elevated and in the US, a recovering economy and rising inflation will see them higher in the face of the Fed’s best attempt to suppress them. With respect to equities, this rising rate environment will create a challenge in terms of impacting still overleveraged economies and companies and in pricing risk. Because of the influence of rates, a good economy doesn’t always equate to a good stock market as the past two years saw a good stock market and a weak economy. Following on this theme in Asia after Thailand unexpectedly raised rates this week, a Chinese news agency said the PBOC will adhere to “prudent monetary policies” vs their previous path of “moderately loose.”
In the US, with the conventional 10 yr yield at 3.01%, the implied inflation rate in the 10 yr TIPS is rising to the highest since May at 2.23% just as AAA said last night that the average gallon of unleaded gasoline rose to $2.90, the most since May. Also, bankrate.com last night said the average 30 yr mortgage rate rose to 4.71% from 4.66% Wednesday and up from 4.55% last Friday. It’s the highest since June. Nov payrolls are expected to total 150k with the private sector contribution being 160k. The unemployment rate is expected to remain unchanged at 9.6%.