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How the Bond Markets React 12.10.04
The Jobs that Weren't
Last Friday signaled a predictable adjustment in the jobs number. Falling well shy of estimates by those learned souls who guess/estimate the report based on any number of indicators from the weather to tea leaves, the big concern would be whether the Federal Reserve would heed those numbers and back down from their promised rate hikes.
Don't count on it. There is a growing belief that inflation will need to be tamed somewhat before they stop their slow steady grind toward a balanced rate - which is long overdue and will take many months, if not a year to have any measured effect on the economic growth.
There are several reason why the Fed will raise rates when they meet next.
The monster that the Fed has created with its accommodative policies needs to be reigned in and soon.
So how does the scenario play out?
Our best predictions see it this way: The economy will slow significantly when the Fed reaches 2.75% level. This will cause them to stop and reassess their position. It also gives them significant breathing room. In the meantime, the spending spree will grind to a halt, slowing imports. When that happens, the global marketplace will falter as well. The trade deficit will look better in part because of continued high prices for commodities. Oil, which has slide lower recently because we have finally filled the strategic reserve - at the most expensive cost possible - will begin to climb back towards $50 a barrel even with a terror premium of $15.
What does that mean for the fixed income trade worldwide? Many believe that foreign investors will continue to buy Treasuries because they have nowhere else to go. These countries have not turned their cash reserves inward and invested in their own countries. That could be a good sign for the President, whose latest folly will be reinventing Social Security to the tune of $1 trillion plus.
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