As Fed plans to raise interest rates three more times in 2007 starting March, long bonds can falter and dollar can rally but what about stocks with extremely inverted yield curve?
John Huang
Oct. 17, 2006

Analytic models are showing Fed is pausing right now but the pause is temporary. They are very concerned about the inflation pressures. As the housing market starts booming again, Fed will have little reason not to raise rates.

In 2007, starting March, Fed will most likely raise rates three times. The long bond yield though will be capped at 5.2% yield. The Asian Central Banks will provide the necessary floor for the long bond. The yield curve in that case will be extremely inverted and the net effect on the economy will be very negative.

The housing market right now will improve just because the sentiment is too negative. However, the prospect of steep inverted yield curve will be severe on stocks right now. At the same time bonds will also falter somewhat as the yield approaches the 5.2% level again. The real benefit will be to US Dollar. While ECB is pausing for real reasons and Bank of Japan is hesitating on raising interest rates, the Dollar get really take off here.

As Fed plans to raise interest rates three more times in 2007 starting March, long bonds can falter and dollar can rally but what about stocks with extremely inverted yield curve?
John Huang
In 2007, starting March, Fed will most likely raise rates three times. The long bond yield though will be capped at 5.2% yield.
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Net Foreign Purchases came at $116.8 Billion while the market was expecting $50.0 Billion – how does it affect Dollar?
Alan Hershey
The core PPI of 0.6% and relatively strong capacity utilization of 81.9% should make Fed think several times before taking any action on lowering rates. The European Central Bank’s recent approach to pause is also remarkable.
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The industrial production slippage of 0.6% contradicts NY Empire State Index of 22.9 –how will stocks, bonds, gold and dollar behave?
Marla Guthrie
Stocks though can falter because stock market is normally ahead of the curve and is predicting what will happen six months later.
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Chicago Mercantile Exchange buys CBOT for $8 billion– it can be a very bad sign for the economy and stocks
Peter Oberois
Another model that tracks smart money flow shows interesting results. Samrt money is buying very long term puts on the stocks.
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A lower capacity utilization of 81.9% can bullish for bonds but it confirms stagflation
Fred Day
The net effect is that Fed cannot lower the rates while economy needs the rates to go down. The effect can be devastating for stocks. Bond and dollar probably will gain from the effect.
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Producer Price Index fell amazing 1.3% while core PPI shot up 0.6% - what does that mean for economy, dollar, bonds and stocks?
Sam Adelton
Again and again the central banks have failed to fight stagflation. They overshoot chasing the inflation and cause eventual depression in the economy. Stagflations when fought with fiscal means end up in deflation and depression.
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The stubborn capacity utilization manifests strength of economy – Dow 15000?
Paula Zubeda
Till it reaches 85, the Fed has no reason to raise rates. And if that pause happens in the middle of a capacity utilization above 80%, it is super-bullish.
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